MATTSON TECHNOLOGY INC
10-K405, 2000-02-15
SPECIAL INDUSTRY MACHINERY, NEC
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<PAGE>   1
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                       ----------------------------------

                                    FORM 10-K


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

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999


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

                         Commission file number 0-21970

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

          DELAWARE                                   77-0208119
  (State or other jurisdiction of                 (I.R.S. employer
   incorporation or organization)                identification number)


                               2800 Bayview Drive
                            Fremont, California 94538
              -----------------------------------------------------
              (Address and zip code of principal executive offices)


Registrant's telephone number, including area code: 510-657-5900

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.


Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

Yes [X]      No [ ]

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

Number of shares outstanding of registrant's Common Stock as of January 31,
2000: 16,285,572

As of January 31, 2000, the aggregate market value of voting Common Stock held
by non-affiliates of the registrant, based upon the closing for registrant's
Common Stock as reported in the Wall Street Journal, was $336,450,223.

<PAGE>   2

FORWARD LOOKING STATEMENTS

        This Annual Report on Form 10-K and the documents incorporated by
reference into this Annual Report contain forward-looking statements that have
been made pursuant to the provisions of Section 21E of the Securities Exchange
Act of 1934. Such forward-looking statements are based on the following: (i)
current expectations, (ii) estimates and projections about the Company's
industry, (iii) management's beliefs, and (iv) certain assumptions made by the
Company's management. Words such as "anticipates", "expects", "intends",
"plans", "believes", "seeks", "estimates", variations of such words and similar
expressions are intended to identify such 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. Actual
results may differ materially from those expressed or forecasted in any such
forward-looking statements. Such risks and uncertainties include those set forth
herein under "Business--Factors That May Affect Future Results and Market Price
of Stock" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" as well as those noted in the documents incorporated
herein by reference. Unless required by law, the Company undertakes 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 the Company files from time to time with the Securities and Exchange
Commission. Of particular use are our Quarterly Reports on Form 10-Q and any
Current Reports on Form 8-K.

                                     PART I

ITEM 1. BUSINESS

        We are a leading supplier of advanced, high productivity semiconductor
processing equipment used in the fabrication of integrated circuits. We provide
our customers with semiconductor manufacturing equipment that delivers higher
productivity and advanced process capability. In addition, through our
international technical support organization and comprehensive warranty program,
we provide world class customer support. Nearly all of our tools are built on a
single platform, known as the Aspen platform. Each Aspen system shares the same
principal architecture, including the main mechanical design, robotics, systems
software, wafer handling interfaces and wafer flow design. Our Aspen platform is
designed to deliver high throughput and low cost of ownership, enhancing the
ability of manufacturers to achieve productivity gains. Our products include
strip, etch, deposition, rapid thermal processing and Epi systems. Our customers
include nine of the top ten semiconductor manufacturers worldwide.

INDUSTRY BACKGROUND

        The manufacture of an integrated circuit, commonly called a chip,
requires a number of complex steps and processes. Most integrated circuits are
built on a base of silicon, called a wafer, and consist of two main structures.
The lower structure is made up of components, typically transistors or
capacitors, and the upper structure consists of the circuitry that connects the
components. Building an integrated circuit requires the deposition of a series
of film layers, which may be conductors, dielectrics (insulators) or
semiconductors. The deposition of these film layers is interspersed with
numerous other processes that create circuit patterns, remove portions of the
film layers and perform other functions such as heat treatment, measurement and
inspection. Each step of the manufacturing process for integrated circuits
requires specialized manufacturing equipment. The overall growth of the
semiconductor industry and the increasing complexity of integrated circuits has
led to increasing demand for advanced semiconductor capital equipment.

HISTORY OF INCREASING SEMICONDUCTOR MANUFACTURING PRODUCTIVITY

        The growth of computer markets and the emergence and growth of new
markets such as wireless communication and digital consumer electronics have
contributed to recent growth in the semiconductor industry. This increase also
has been fueled by the semiconductor industry's ability to supply increasingly
complex, higher performance integrated circuits, while continuing to reduce
cost. The more complex integrated circuits and the accompanying reductions in
feature size require more advanced and expensive wafer fabrication equipment and
increase the average cost of advanced wafer fabrication facilities. For example,
the average cost in 1984 for a 64 kilobit dynamic random access memory
integrated circuit, called a DRAM, fabrication facility was approximately $60.0
million. Today the cost for a 64 megabit DRAM fabrication facility can range
from $1.0 billion to $2.0 billion. As the semiconductor industry has matured and
pricing has become more competitive, it has become increasingly difficult to
achieve manufacturing efficiencies to offset these increased costs.


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        Technological advances in semiconductor manufacturing equipment have
historically enabled integrated circuit manufacturers to increase productivity
dramatically by:

        -      reducing feature size of integrated circuits;

        -      increasing manufacturing yields;

        -      improving the utilization of wafer fabrication equipment; and

        -      increasing the wafer size.

        Reducing feature sizes. Smaller feature sizes allow more circuits to fit
on one wafer. Due to this reduction in feature size, the semiconductor industry
has historically been able to double the number of transistors on a given space
of silicon every 18 to 24 months. These reductions have contributed
significantly to reducing the manufacturing cost per chip. Continued innovation
in equipment technology would be required, however, to maintain this trend in
device size reduction.

        Higher manufacturing yields. In the last fifteen years, manufacturing
yields, or the percentage of good integrated circuits per wafer, have increased
substantially, while the time to reach maximum yield levels during a production
lifecycle has decreased significantly. For example, the percentage of good DRAMs
per wafer during initial production has increased from 20% fifteen years ago to
over 80% at present. Given this high yield, the potential for further yield
improvement per wafer is limited.

        Improved equipment utilization. The utilization of semiconductor
manufacturing lines has improved in the last ten years. Manufacturing lines now
operate continuously. In addition, equipment is typically run at utilization
rates of greater than 90%, leaving limited room for further improvement in
equipment utilization.

        Larger wafer sizes. By increasing the wafer size, integrated circuit
manufacturers can produce more circuits per wafer, thus reducing the overall
manufacturing costs per chip. Leading edge wafer fabrication lines are currently
using 200 millimeter diameter wafers, up from the 100 millimeter diameter wafers
used ten to fifteen years ago. Currently, some integrated circuit makers are
commencing pilot production lines using 300 millimeter diameter wafers. We
believe that many more manufacturers will add 300 millimeter production
capabilities within the next two to five years. Although the transition to a 300
millimeter wafer size will reduce overall manufacturing costs per chip, we do
not believe that the semiconductor industry will transition as quickly to larger
wafer sizes in the future, limiting the impact on overall manufacturing costs
per chip.

EQUIPMENT PRODUCTIVITY HAS DECLINED

        While the semiconductor manufacturing industry has achieved significant
productivity gains through technological advances during the last ten to fifteen
years, equipment productivity has actually declined in favor of improved process
control. Demands from integrated circuit manufacturers for better process
quality control, reduced feature sizes and larger wafer sizes have resulted in a
shift from batch processing, where multiple wafers are processed simultaneously,
to single wafer processing, where one wafer is processed at a time. Although
this shift has enhanced semiconductor quality, it has reduced total wafer
throughput and increased overall equipment cost.

        Semiconductor equipment manufacturers initially responded to the problem
of declining equipment productivity by developing cluster tools, which attempt
to increase throughput by employing multiple single wafer processing chambers on
a common handling platform. This architecture provides customers the precision
and control of a single wafer system together with the benefits of increased
productivity. However, compared to batch processing, cluster tools are highly
complex systems, requiring redundant hardware systems that often result in lower
reliability. In addition, cluster tools have only modestly improved upon the
wafer throughput of single wafer processing and have not fully met the
productivity needs of semiconductor manufacturers.

        Faced with diminishing productivity gains and increasing equipment
costs, integrated circuit manufacturers have challenged equipment manufacturers
to provide more cost-effective, higher productivity fabrication equipment. This
challenge has led to the use of cost of ownership to measure productivity. Cost
of ownership measures the costs associated with the operation of equipment in a
fabrication line. We calculate the cost of ownership by first estimating the
total costs to operate a system including depreciation, overhead and labor and
materials, and then dividing those costs by the total wafer production by the
system.

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        The focus by semiconductor manufacturers on cost of ownership and the
high cost of expanding integrated circuit manufacturing facilities has led many
of them to outsource their manufacturing to independent foundries. These
foundries have responded to rapidly growing demand by producing integrated
circuits for semiconductor companies that do not own fabrication lines or
manufacturing facilities or for semiconductor manufacturers which have decided
to outsource some of their manufacturing. Since foundries operate a volume
business and produce different integrated circuits for each manufacturer, they
require equipment that can be modified to suit multiple requirements and are
even more focused on productivity and low cost of ownership.

THE MATTSON SOLUTION

        We provide our semiconductor manufacturing customers with equipment that
delivers higher productivity and advanced process capability, together with
world class support. The unique multi-station, multi-chamber architecture of our
Aspen systems integrates all of our common wafer handling functions into a core
platform, which serves as the foundation for nearly all of our products. This
platform is designed to deliver high throughput, low cost of ownership and
savings of expensive cleanroom space, enhancing the ability of manufacturers to
achieve productivity gains.

        The key benefits of our solution are:

        High productivity. Our systems offer semiconductor manufacturers
improvements in wafer manufacturing productivity and throughput over
conventional single wafer systems and cluster tools. Our unique multi-station,
multi-chamber architecture improves process precision and control while
increasing throughput. In contrast to typical cluster tools, our systems process
multiple wafers in each process chamber, resulting in correspondingly higher
throughput. For example, our Aspen III platform can have three process modules,
each with two process stations, resulting in six wafer processing stations on
one system. In this way, our platform allows multiple process chambers that
support various applications or increased capacity for any one application. By
processing multiple wafers concurrently in one process chamber and using
multiple process chambers, we are able to significantly increase throughput
without sacrificing process quality.

        Further productivity gains are achieved by reducing the time during
which the system is not actually processing wafers. For example, our Aspen
platform robotics handle multiple wafers simultaneously. In addition, by using a
vacuum loadlock and handling wafers under vacuum, our Aspen system eliminates
the overhead time required to pump down the process chambers to vacuum and
backfill the chambers to atmospheric pressure after processing. With higher
throughput, our customers require fewer systems, and, accordingly, realize
substantial savings in capital outlay and cleanroom space.

        Innovative technology. Our systems provide innovative solutions that
address technical or manufacturing problems of the semiconductor equipment
industry, where traditional technologies have been unable to satisfy emerging
process requirements. For example, when using traditional stripping systems,
submicron etching results in residues that can require multiple acid processing
steps for removal. Using our proprietary inductively coupled plasma strip source
technology, our Aspen Strip's plasma processes are capable of removing many of
these residues without the need for the acid steps. Our Aspen III CVD system has
one of the first process chambers that can process either 200 or 300 millimeter
wafers with only minor modifications. In addition, our Aspen RTP system employs
susceptor-based heating which provides the uniformity and thermal budget control
of a rapid thermal processing system with the reliability and low cost of
ownership of a batch furnace.

        World class customer support. We deliver superior customer support and
service to enhance our long term customer relationships. We offer an extensive
warranty, provide unlimited access to training and maintain an international
customer support infrastructure with local support personnel to install systems,
perform warranty and out-of-warranty service and sales support. We offer a
comprehensive standard warranty of up to 36 months in most geographic regions of
the world.

THE MATTSON STRATEGY

        Our objective is to enhance our market position as a leading supplier of
advanced, high productivity manufacturing equipment to the worldwide
semiconductor industry. The key elements of our strategy include:

        Deliver high productivity, cost-effective systems. We intend to continue
to be a leading provider of high productivity, low cost of ownership
semiconductor manufacturing equipment. Leveraging the unique benefits of our
Aspen platform and our multi-station process chamber, we intend to continue
developing systems that enable high throughput while maintaining high precision
and control, at a manufacturing cost advantage.

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        Leverage innovative technologies to provide product differentiation. We
intend to apply our design expertise to provide new solutions that combine
advanced technology with higher productivity. We will leverage our innovative
process chamber design to develop new products that address specific, unmet
needs in the semiconductor manufacturing industry. When we entered the rapid
thermal processing market, we developed a unique process chamber design that
utilized a susceptor-based heater to eliminate the problems associated with
traditional lamp-based rapid thermal processing heating. Similarly, with our
strip system we offer one of the only ICP-based plasma sources.

        Increase global market penetration. We plan to increase the penetration
of our products on a worldwide basis and to expand our customer base by
leveraging our position as a global supplier of technologically advanced
semiconductor manufacturing solutions. We believe the Asia-Pacific region, where
we have had a long-standing presence and commitment, offers one of the best
growth opportunities due to the proliferation of independent foundries located
in this region. We believe our global commitment, our extensive customer support
and the high productivity and low cost of ownership of our products make our
solutions particularly well-suited to independent foundries seeking increased
efficiency and reliability.

        Capitalize on our diversified product line and rapid time to market. We
intend to leverage our leadership position with the Aspen Strip products to sell
additional products that share our common platform, including our CVD, RTP and
etch products. We believe that our success with our strip products has created
an installed base of existing customers and highlighted the productivity and
cost of ownership advantages of our products. In addition, the modular design of
our Aspen platform enables us to develop new systems by adding different process
chambers to the same platform. By focusing our internal development efforts on
the process module, rather than on an overall system, we reduce development time
for new products, reduce time to market and lower development costs. We intend
to develop new products to meet the evolving requirements of existing customers
and penetrate new customers.

        Pursue leadership in the emerging 300 millimeter market. We seek to take
a leading role in the emerging 300 millimeter market and have designed our Aspen
III CVD system to be compatible with both 200 millimeter and 300 millimeter
wafers. We have sold more than twenty 300 millimeter compatible Aspen III Strip
and CVD systems, with systems running at production volumes on both 200
millimeter and 300 millimeter wafers. Our 300 millimeter compatible tools
include the Aspen III Strip, Aspen III LiteEtch and Aspen III CVD systems.

        Provide world class customer support. We believe that our international
customer support organization is an important element in establishing and
maintaining long term customer relationships that are often the basis upon which
a semiconductor manufacturer selects an equipment vendor. Further, we intend to
enhance the benefits provided by our products by continuing to build customer
loyalty through the quality of our service and support. We intend to continue to
offer leading all-inclusive warranties, unlimited training and regional field
and process support.

MARKETS AND APPLICATIONS

PHOTORESIST STRIPPING MARKET

        A stripping system removes photoresist and post-etch film residues from
a wafer between every step before further film deposition or diffusion
processing. Methods for stripping photoresist include wet chemistries and dry,
or plasma, technologies. Wet chemical stripping removes photoresist by immersing
the wafer into acid or solvent baths. Dry stripping systems, such as our Aspen
Strip, create gaseous atomic oxygen to which the wafer is exposed to remove the
photoresist and residue while maintaining device integrity.

        The demand for photoresist strip equipment has grown as the complexity
and number of strip steps required for each wafer have increased. Complex
integrated circuits require multiple additional photoresist stripping steps,
which increase cost and cycle time, create environmental concerns, increase
cleanroom space requirements and reduce yield. The increase in strip steps in
the integrated circuit manufacturing process has led to a need for semiconductor
manufacturers to increase their photoresist strip capacity and to place greater
emphasis on low damage results and residue-free photoresist stripping. The added
complexity of the strip process has also contributed to higher average selling
prices of such equipment.

        Fabrication of advanced integrated circuits with feature sizes under
0.18 micron requires advanced dry strip technologies such as our Aspen Strip. In
addition, faster devices require new interconnect materials, such as low
capacitance, or low k dielectric films and copper for conducting materials. The
use of these new materials creates new challenges for photoresist stripping
equipment. The resist or residues must be removed from these materials without
degrading the low k materials and without oxidizing any exposed copper.

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        According to Dataquest, the dry strip market was projected to grow from
$163 million to more than $300 million by the year 2002. We entered this market
in 1991 with our Aspen Strip system.

CHEMICAL VAPOR DEPOSITION MARKET

        Chemical vapor deposition processes are used to deposit dielectric and
conducting films on wafers. These films are the basic material 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.

        Plasma enhanced chemical vapor deposition is a type of chemical vapor
deposition process used to deposit insulating films. Plasma enhanced chemical
vapor deposition allows the system to process wafers at a relatively low
temperature, reducing the risk of damage to aluminum metalization layers during
processing. Film stress and density can be controlled independent of process
chemistry.

        As feature sizes continue to decrease, chemical vapor deposition
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, are critical. Finally, as process complexity increases with the use
of low k and dual damascene processing solutions, the number of plasma enhanced
chemical vapor deposition steps increases significantly and system productivity
increases in importance.

        Dataquest estimated that the segments of the CVD market for CVD
dielectrics in which we compete was approximately $1.1 billion in 1999 and would
grow to more than $2.5 billion in the year 2002. We entered this market in 1994,
with the introduction of our second system, Aspen CVD.

RAPID THERMAL PROCESSING MARKET

        Rapid thermal processing is the process by which annealing or heating of
semiconductor wafers is accomplished with minimum thermal exposure.
Historically, diffusion furnaces have been used to heat-treat large batches of
wafers. As device features have become smaller, the total temperature exposure
of the wafer, or the thermal budget, has decreased. Diffusion furnaces have long
processing times, which is unacceptable for many annealing processes. Rapid
thermal processing subjects the wafer to much shorter processing times, thus
reducing the thermal budget. Individual wafers are rapidly heated to process
temperature, held for a few seconds and rapidly cooled. Traditional rapid
thermal processing systems use heat lamps, located outside the process area, and
heat the wafer by radiant energy that passes through transparent windows.

        As device geometries and thermal budgets shrink, rapid thermal
processing is emerging as a key semiconductor processing technology. As the
number of layers on semiconductor wafers has increased, the demand for rapid
thermal processing equipment specific to applications in the fabrication process
has also increased. As with chemical vapor deposition technology, rapid thermal
processing systems are continuing to be subject to increasingly stringent
processing demands and must maintain uniformity and repeatability to ensure the
integrity of the integrated circuit.

        Dataquest estimated that the combined rapid thermal processing and
furnace market was $553 million in 1999 and projected that the market would
increase to more than $1.2 billion in the year 2002.

ISOTROPIC ETCH MARKET

        The etching process selectively removes patterned material from the
surface of a wafer to create the device structures. With the development of
sub-micron integrated circuit feature sizes, dry, or plasma, etching has become
one of the most frequently used processes in semiconductor manufacturing. Today,
chemical dry etch processes are applicable to a broad range of critical and
non-critical applications throughout the wafer manufacturing process.

        An isotropic, or multi-directional, etch system performs a variety of
etch processes on semiconductor wafers that can be used in several steps in a
typical 0.18 micron chip fabrication. As device feature sizes continue to
decrease, processes used to remove films from wafers must be ever more selective
to prevent damage to the films in the underlying layers. This process capability
and control is necessary to produce reliable and yielding devices. As device
geometries shrink below 0.18 micron, the ability to maintain process control
with wet chemicals will be limited.

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EPI MARKET

        Epitaxial, or Epi, deposition systems grow a layer of extremely pure
silicon on a wafer in a uniform crystalline structure to form a high quality
base for building certain types of chips. The silicon properties of the epitaxy
produce a more controlled silicon growth than do manufactured silicon wafers and
offer features that differentiate it from manufactured silicon wafers. The use
of epitaxy can result in significant increases in yield during the manufacturing
process and can enable the manufacture of novel structures. In addition, device
manufacturers are able to manipulate and tightly control the quality and
conductivity of the silicon.

        The market is broken into two segments: applications that require thin
Epi, which are typically less than five microns thick, and applications that
require thicker Epi film layers, including analog and power devices, sometimes
as thick as 100 microns. Our EpiPro series uses a dual chamber batch system that
addresses the thick Epi market. Our EpiPro series was introduced in 1998.

PRODUCTS AND TECHNOLOGY

        Nearly all of our tools are built on a common platform, known as the
Aspen System. The Aspen II platform was introduced in 1993 and is used for four
product lines, accounting for the majority of our historical revenue. This
platform processes wafers from 100 millimeter to 200 millimeter in diameter. The
Aspen Strip, Aspen CVD, Aspen RTP and LiteEtch products are all based on the
Aspen II platform, which includes wafer handling robotics, dual loadlocks,
control electronics and system software.

        Our Aspen III platform was introduced in 1998 and is targeted for
advanced design features on 300 millimeter and some 200 millimeter wafers. This
next generation platform is designed to improve productivity and throughput. All
of our 300 millimeter systems are built using this platform. In 1998, we
developed the Aspen III Strip and Aspen III CVD equipment for 300 millimeter
strip and chemical vapor deposition processes based on the new Aspen III
platform.

        The chart below summarizes our product offerings and applications and
the platforms used for each product line.

<TABLE>
<CAPTION>
Product Name          Applications                                                                   System Platform
- ------------          ------------                                                                   ---------------
<S>                   <C>                                                                            <C>
Aspen II Strip        Using dry chemistry, this inductively coupled plasma strip system              Aspen II for 100-200mm
                      removes photoresist and post-etch residues before further film deposition
                      or diffusion processing while maintaining device integrity.                    Aspen III for 300mm
Aspen III Strip

Aspen II CVD          Plasma enhanced chemical vapor deposition system deposits insulating           Aspen II for 100-200mm
Aspen III CVD         dielectric films on wafers.                                                    Aspen III for 200-300mm

Aspen RTPFR3          Rapid thermal processing using a susceptor-based heater used for implant       Aspen II for 100-200mm
                      anneals, silicide formations, high and low k dielectric anneals, glass         Aspen III for 300mm under
                      reflow, and copper anneal.                                                     development

Aspen II LiteEtch     Isotropic etch system using a patented inductively coupled plasma source,      Aspen II for 100-200mm
                      designed for a variety of etch processes used in several steps in a typical
Aspen III LiteEtch    0.18 micron chip fabrication.                                                  Aspen III for 300mm

EpiPro Series         Dual chamber, batch reactor deposits a wide range of epitaxial silicon         Non-Aspen platform for
                      film thickness with tight process control.                                     75-200mm
</TABLE>

THE ASPEN STRIP

        The Aspen II Strip consists of the standard Aspen II platform together
with one or two processing chambers. Each chamber processes two wafers at a
time. System throughput varies with the photoresist thickness and is
approximately 90 to 130 wafers per hour with one chamber and 110 to 160 wafers
per hour with two chambers for most applications. The residue removal capability
of this system reduces the need for wet chemical steps, which allows a greater
reduction in cost of ownership by decreasing the number of wet stations
required.

        The Aspen III Strip consists of the standard Aspen III platform together
with one, two or three processing chambers. Each chamber processes two wafers at
a time. System throughput varies with the resist thickness and is approximately
140 to 180 wafers per hour with one chamber, 160 to 200 wafers per hour with two
chambers and greater than or equal to 200 wafers per hour with three

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chambers for most applications. The innovative system design exceeds the current
throughput, cost of ownership and footprint requirements set by industry
consortia for 300 millimeter strip equipment. We believe the two chamber Aspen
III Strip offers a substantial reduction in cost of ownership relative to
conventional 300 millimeter single wafer systems.

        Each of our Aspen II and Aspen III Strip systems use one of our two
proprietary inductively coupled plasma, or ICP, source technologies to remove
photoresist and residue from the wafer. Our ICP technology was introduced in
1997 to further extend the capability for removal of the most difficult residues
formed during semiconductor processing. The ICP's thorough residue removal
capability reduces the need for wet chemical steps. This physically remote
plasma source generates a gentle, low energy plasma that achieves advanced
photoresist stripping and residue removal and low contamination while
maintaining device integrity and without additional chemical processing. The ICP
source was specifically designed for advanced semiconductor device manufacturing
processes of 0.18 micron and below. When combined with an Aspen II or Aspen III
platform, we believe that the Aspen Strip system provides significant cost of
ownership advantages.

        Our second source technology, our Aspen ICPSM, with selectable mode
offers manufacturers advanced low temperature strip capabilities and allows the
user to select the plasma mode for each step in the process. The Aspen ICPSM
system is applicable to a variety of advanced applications, including high dose
implant strip, via residue removal, post metal etch residue removal, and surface
cleaning for advanced silicide applications, as well as cleaning low k trenches
or vias.

        We have also developed a strip solution for low k cleaning that is
currently being used in production. Our new strip capability provides advanced
processing recipes that enable interconnect technology for 0.18 micron and
smaller geometries using a wide range of hydrogen and fluorine chemistries. This
Aspen Strip feature enables manufacturers to clean vias or trenches with exposed
low k materials while maintaining low k film integrity. In addition, it enables
effective cleaning of copper films. The low k strip feature can be ordered as an
option with ICP and/or ICPSM chambers.

THE ASPEN CVD

        The Aspen II CVD system is based on the Aspen II platform. The Aspen II
CVD system can be configured with one or two process chambers, and each chamber
can process four wafers at a time. The second chamber can be used to increase
throughput with a minimal increase in footprint.

        The Aspen III CVD system is based on the Aspen III platform and can be
configured with one, two or three process chambers, where each chamber can
process two wafers at a time. The Aspen III CVD system deposits dielectric film
and silane-based films, and we offer a number of plasma enhanced chemical vapor
deposition applications. Depending on the type of film deposited, the Aspen III
CVD has the capability to process up to 180 wafers per hour, affording a cost of
ownership advantage not found on competitive systems. The Aspen III CVD features
a small volume chamber design that allows shortened automatic clean times for
increased system availability and uptime. The smaller chamber also permits
higher deposition rates. The resulting higher throughput permits the use of
slower, more consistent and less damaging process technologies than are
economically feasible in conventional single wafer systems.

        Our plasma enhanced chemical vapor deposition technology allows the
system to process wafers at the relatively low temperature of 400 degrees
Celsius or less, required for processing after aluminum metallization layers are
deposited on the wafer. Film stress and density can be controlled independent of
process chemistry by the use of a low frequency radio frequency bias. Our dual
loadlocks isolate the process chamber from pressure and temperature
fluctuations. This isolation of the process chamber reduces particulates and
improves film quality and repeatability.

        The Aspen III CVD system is one of the first chemical vapor deposition
bridge systems in the industry that is capable of handling both 200 millimeter
and 300 millimeter wafer production with minor modifications to the platform.
Other 200 millimeter systems cannot convert to 300 millimeter production, or may
require completely new process chambers to convert to 300 millimeter production.
The flexible system design addresses the needs of large volume manufacturing
where cost is a major consideration. Aspen III CVD has one of the smallest
footprints available in 200 and 300 millimeter plasma enhanced chemical vapor
deposition tools and provides a throughput advantage for selected thin film
applications.

        We believe that the Aspen III CVD system is well positioned for dual
damascene processing applications, where more plasma enhanced chemical vapor
deposition layers are required. Dual damascene applications require two to three
thin dielectric layers.



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THE ASPEN RTP(FR3)

        Based on the Aspen II platform, the Aspen RTPFR3 is designed to meet the
requirements for advanced sub 0.18 micron processing while satisfying the
demands of high volume manufacturing. It handles up to 110 wafers per hour for
selected processes. The simple design of the process chamber has no moving parts
and no consumables, which contributes to its low preventive maintenance
requirements. Because the system uses a susceptor instead of conventional lamp
rapid thermal processing technology, power consumption has been minimized,
further reducing maintenance requirements, consumables costs and cost of
ownership.

        Our Aspen RTPFR3 system employs susceptor-based heating technology for
temperature stability, uniformity and repeatability in a wide operating range of
100 to 1200 degrees Celsius to handle both rapid thermal processing and many
furnace applications. The system provides a number of leading edge applications.
Our Aspen RTPFR3 system features thermal isolation to keep the uniformity of the
wafer temperature independent of the process temperature. Uniformity can be
achieved over a wide range of process temperatures for both long and short
process times. Proprietary wafer handling techniques are used to remove wafers
from the chamber at process temperature, eliminating the cool-down time required
by other systems. Our wafer handling also achieves high throughput that results
in lower thermal budgets. After processing, the system can also perform chamber
cleaning without operator intervention.

THE ASPEN LITEETCH

        Our isotropic etch products, the Aspen II LiteEtch and Aspen III
LiteEtch, use our proprietary ICP source, the same source used in our Aspen
Strip product. This physically remote ICP source uses a high pressure plasma
process to produce a low energy plasma that achieves high etch rates with better
etch rate uniformity, greater profile control and selectivity and low wafer
damage, while minimizing electrically charged particles that can damage
sensitive semiconductor devices. With the transition from wet to dry processing
for key application steps, we believe that Aspen LiteEtch offers enabling
technological capabilities with the benefits of dry etch tools. These benefits
include lower cost of ownership than wet stations and lower capital outlay than
anisotropic etchers, savings in cleanroom floorspace and greater process
automation for ease of use, as well as reduced chemical waste.

        The Aspen LiteEtch system is available on our standard Aspen II
platform, together with one or two process chambers, or our Aspen III platform,
together with one, two or three process chambers. Each chamber processes two
wafers at a time, while retaining single wafer process control. For most
applications, system throughput typically varies with the process from 40 to 80
wafers per hour for a single chamber system and from 70 to 110 wafers per hour
for a dual chamber system.

EPIPRO SYSTEMS

        The EpiPro series is our next-generation, cost-effective Epi reactor for
epitaxial deposition. This high capacity system is capable of depositing a wide
range of film thicknesses on 75 millimeter to 200 millimeter silicon wafers,
while simultaneously reducing the cost of Epi processing. By improving
throughput, the customer is able to reduce the cost of depositing Epi layers.
This is a primary purchasing consideration of our targeted market segment,
manufacturers of semiconductors with thick Epi layers.

        The EpiPro epitaxy reactor is specifically designed for growing Epi
layers on silicon wafers. The system supports long processing times at high
temperatures with a high degree of thickness and resistivity uniformity across
the wafer and achieves customer specifications for silicon lattice defects.

CUSTOMER SUPPORT

        We believe that our customer support organization is critical to
establishing and maintaining the long term customer relationships that often are
the basis upon which semiconductor manufacturers select their equipment vendor.
Our customer support organization is headquartered in Fremont, California, with
additional employees located domestically in Arizona, Idaho, Maryland,
Massachusetts, New Jersey, Oregon, Texas and Virginia and internationally in
Germany, Italy, France, Japan, Korea, Singapore, Taiwan and the United Kingdom.
Our support personnel have technical backgrounds, with process, mechanical, and
electronics training, and are supported by our engineering and applications
personnel. Support personnel install systems, perform warranty and
out-of-warranty service, and provide sales support.

        We were the first in the industry to offer a standard 24 month warranty,
and in 1996, the first to offer a standard 36 month warranty. We offer a 36
month warranty on all of our systems sold after January 1996, other than our
EpiPro 5000 system and other than those sold in Japan. Our 36 month warranty,
designed to differentiate our service from other semiconductor equipment
suppliers, includes preventive maintenance during warranty as well as
installation support. Our 36 month warranty also specifies no consumables costs,
which can be a significant factor in cost of ownership calculations. We offer a
12 month warranty in Japan and on

                                       9
<PAGE>   10

our EpiPro 5000 system. We also offer unlimited access to no-cost training at
our headquarters, maintain spare parts depots in every region for four hour
parts turnaround and provide regional field and process support.

SALES AND MARKETING

        We sell our systems primarily through our direct sales force. In
addition to the direct sales force at our headquarters in Fremont, California,
we have domestic regional sales offices located in Arizona, Maryland, New
Jersey, Oregon and Texas. We also maintain sales support offices in Germany,
Italy, Japan, Korea, Singapore, Taiwan, and the United Kingdom. We are
continuing to increase the size of our sales force both domestically and
internationally.

        We are in the process of establishing a direct sales force in Japan and
terminating our distribution relationship with our distributor, Marubeni. By
establishing our own direct sales force, we believe we can continue to increase
our sales in Japan and provide our customers with improved customer service. We
expect that this process will be completed during the first half of 2000. We may
be required to repurchase up to $1.0 million of inventory related to our sales
to Marubeni as a result of the termination of the distribution agreement. We
recorded deferred income at the time of sale to cover this right of return.
Although we intend to invest significant resources in our sales efforts in
Japan, including hiring additional personnel to support our direct sales effort,
we may not be able to maintain or increase our sales to the Japanese
semiconductor industry. We may miss sales opportunities or lose competitive
sales as a result of this transition in our sales organization. When we make
sales directly to customers in Japan, we expect payment terms to be as long as
180 days from shipment, and we may incur currency risk if sales are denominated
in Japanese Yen.

        International sales accounted for 71% of total net sales in 1999, 67% in
1998 and 65% in 1997. We anticipate that international sales will continue to
account for a significant portion of net sales. International sales are subject
to certain risks, including unexpected changes in regulatory requirements,
exchange rates, tariffs and other barriers, political and economic instability,
difficulties in accounts receivable collections, extended payment terms,
difficulties in managing distributors or representatives, difficulties in
staffing and managing foreign subsidiary operations and potentially adverse tax
consequences. Because of our dependence upon international sales in general, and
on sales to Japan and Pacific Rim countries in particular, we are particularly
at risk to effects from developments such as the recent Asian economic problems.
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 Our International Sales, Particularly Sales in Asian
Countries, and If We Are Unable to Sustain and Increase Our International Sales,
We May Not Achieve Anticipated Revenue Growth."

CUSTOMERS

        The following is a representative list of our major semiconductor
manufacturing customers:

Advanced Micro Devices    Microchip Technology   Sony
Hitachi                   NEC Corporation        STMicroelectronics
IBM Microelectronics      Samsung                Texas Instruments

        The following is a representative list of our major foundry customers:

Chartered Semiconductor Manufacturing/Silicon Manufacturing Partners Pte. Ltd.
Taiwan Semiconductor Manufacturing Company
Silicon Integrated Systems
UMC Group
WaferTech

        In 1999, one customer, Samsung, accounted for approximately 20% of our
net sales and in 1997, one customer, Taiwan Semiconductor Manufacturing Company,
accounted for approximately 11% of our net sales. Although the composition of
the group comprising our largest customers has varied from year to year, our top
ten customers accounted for 63% of our net sales in 1999, 56% in 1998 and 60% in
1997. For a discussion of risks associated with changes in our customer base,
see "Risk Factors -- Year-to-Year Changes in Our List of Major Customers Make It
Difficult to Forecast Our Revenue and Achieve Our Sales Goals."


                                       10
<PAGE>   11
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.
All orders are subject to cancellation or delay by the customer with limited or
no penalty. Our backlog was approximately $56.1 million as of December 31, 1999,
$22.7 million as of December 31, 1998 and $41.5 million as of December 31, 1997.
The year-to-year fluctuation is due primarily to the cyclical nature of the
semiconductor industry. 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.
Because of possible changes in delivery schedules and cancellations of orders,
our backlog at any particular date is not necessarily representative of actual
sales for any succeeding period. In particular, during periods of industry
downturns we have experienced significant delays relating to orders that were
previously booked and included in backlog.

RESEARCH, DEVELOPMENT AND ENGINEERING

        Our research, development and engineering efforts are focused upon our
multi-product strategy. During recent periods, we have devoted a significant
amount of resources to our Aspen III platform, the Aspen III CVD system,
improvements to our Aspen RTPFR3 system and the EpiPro 5000 system. We expect to
focus our future efforts on our Aspen III RTP system for 300 millimeter
applications, development of a low k chemical vapor deposition film using our
Aspen CVD system, development of advanced resist and residue cleaning
capabilities and additional features on our Aspen III platform.

        We have been actively involved in the development of advanced low k
plasma enhanced chemical vapor deposition processing with various customers
around the world. By using standard hardware with gas changes, we have been able
to deposit stable films with k values as low as 2.6. These low k values will
become increasingly important as device feature sizes continue to be reduced and
line-to-line capacitance becomes a limiter to the speed of integrated circuit
devices.

        We maintain an applications laboratory in Fremont to test new systems
and customer-specific equipment designs. By basing products on the Aspen
platform, we believe that we can focus our development activities on the process
chamber and develop new products quickly and at relatively low cost. For
example, we believe we were able to reduce new product development time on our
CVD, RTP and LiteEtch products.

        The markets in which our customers and 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 process technologies, and to
develop systems and new technologies that compete effectively. In addition, we
must adapt our systems and processes to 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 $19.5 million
for the year ended December 31, 1999, $16.7 million for the year ended December
31, 1998 and $14.7 million for the year ended December 31, 1997, representing
18.9% of net sales in 1999, 28.2% in 1998 and 19.2% in 1997.

COMPETITION

        The global semiconductor fabrication 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 our 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 fabrication 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 for

                                       11
<PAGE>   12

us to sell to a particular customer for a significant period of time after that
customer has selected a competitor's product, and it may be difficult for us to
unseat an existing relationship that a potential customer has with one of our
competitors in order to increase sales of our products to that customer.

        Each of our product lines competes in markets defined by the particular
wafer 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 same market segments in which we compete. 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 Alcan
Technology, Eaton Corporation, GaSonics International, Hitachi, KEM, Matrix
Integrated Systems and Plasma Systems. We believe that we compete favorably on
each of the competitive elements in this market and estimate that we are the
leading provider of dry strip products. The market in which our Aspen LiteEtch
products compete is a relatively small niche market with no dominant
competitors. Principal competitors for our Aspen LiteEtch systems include
GaSonics, Lam Research, Shibaura Mechatronics and Tegal. Principal competitors
for our Aspen CVD systems include Applied Materials, ASM International and
Novellus Systems, with Applied Materials and Novellus representing a major share
of the market. Principal competitors for our Aspen RTP systems include Applied
Materials and Steag Microelectronics. Principal competitors for our EpiPro
systems include Advanced Semiconductor Manufacturing, LPE Products, Moore
Technology and Toshiba.

        We may not be able to maintain our competitive position against current
and potential competition. New products, pricing pressures, rapid changes in
technology and other competitive actions from both new and existing competitors
could materially affect our market position. Some of our competitors have
substantially greater installed customer bases and greater financial, marketing,
technical and other resources than we do and may be able to respond more quickly
to new or changing opportunities, technologies and customer requirements. Our
competitors may introduce or acquire competitive products that offer enhanced
technologies and improvements. In addition, some of our competitors or potential
competitors have greater name recognition and more extensive customer bases that
could be leveraged to gain market share to our detriment. We believe that the
semiconductor equipment industry will continue to be subject to increased
consolidation, which will increase the number of larger, more powerful companies
and increase competition.

MANUFACTURING

        Our manufacturing operations are based in our Fremont facility and
consist of procurement, subassembly, final assembly, test and reliability
engineering. Our current Strip, CVD, RTP and LiteEtch systems are based on the
Aspen platform, enabling us to use a large number of common subassemblies and
components. Many of the major assemblies are procured complete from outside
sources. We focus our internal manufacturing efforts on those precision
mechanical and electro-mechanical assemblies that differentiate our systems from
those of our competitors.

        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
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 which 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.

                                       12
<PAGE>   13

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 more than
eight United States patents and corresponding foreign patents and more than 20
patent applications pending covering various aspects of our products and
processes. 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, 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
dispute or other intellectual property dispute or action to protect trade
secrets and know-how could have a material adverse effect on our business.


                                       13
<PAGE>   14
EMPLOYEES

        As of December 31, 1999, we had 443 employees. There were 104 employees
in manufacturing operations, 96 in research, development and engineering, 200 in
sales, marketing and field service and customer support, and 43 in general,
administrative and finance.

        The success of our future operations depends 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. The
competition for such personnel is intense, particularly in the San Francisco Bay
Area, where our headquarters is located. At times we have experienced difficulty
in attracting new personnel and we may not be successful in retaining or
recruiting sufficient key personnel in the future. None of our employees is
represented by a labor union and we have never experienced a work stoppage,
slowdown or strike. We consider our relationships with our employees to be good.

ITEM 2: PROPERTIES

        We maintain our headquarters in Fremont, California. We have leases for
two facilities of 61,000 and 60,000 square feet, which expire in February 2001
and April 2003, respectively. Our future growth may require that we secure
additional facilities or expand our current facilities further before the term
of our headquarters lease expires. Any move to new facilities or expansion could
be disruptive and cause us to incur significant unexpected expense. We also
lease sales support offices in Japan, Singapore, Korea, Taiwan and Germany with
expiration dates from August 2000 through January 2001.

ITEM 3: LEGAL PROCEEDINGS

        We are not aware of any pending legal proceedings against us that,
individually or in the aggregate, would have a material adverse effect on our
business, operating results or financial condition. We may in the future be
party to litigation arising in the course of our business, including claims that
we allegedly infringe third party trademarks and other intellectual property
rights. Such claims, even if not meritorious, could result in the expenditure of
significant financial and managerial resources.

ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        Not applicable.


                                       14
<PAGE>   15

                                           PART II

ITEM 5. MARKET FOR THE REGISTRANTS COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS

STOCK LISTING

Mattson Technology's common stock has been traded on the Nasdaq National Market
since the Company's initial public offering on September 28, 1994. Our stock is
quoted on the NASDAQ National Market 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.

<TABLE>
<CAPTION>
1999                                      HIGH         LOW
- ----------------------------------------------------------------
<S>                                      <C>          <C>
First                                    10 1/8       5 1/2
Second                                   12 7/8       5 3/4
Third                                    15 3/8         10
Fourth                                   18 1/4         11

1998
- ----------------------------------------------------------------
First                                     9 7/8         6
Second                                   7 15/16      5 1/8
Third                                    6 3/16      2 29/32
Fourth                                    7 3/4       2 3/4

- ----------------------------------------------------------------
</TABLE>


The Company has never paid cash dividends on its common stock and has no present
plans to do so. The Company intends to retain all future earnings for use in its
business. On January 31, 2000, the last reported sales price of the Company's
common stock on the Nasdaq National Market was $29.13 per share. The Company had
approximately 175 shareholders of record on that date.


                                       15
<PAGE>   16

ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data has been derived from the Company's
audited consolidated financial statements. The historical financial data should
be read in conjunction with the Company's consolidated financial statements and
notes thereto.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                    YEAR ENDED DECEMBER 31,
                                                     --------------------------------------------------
                                                       1995       1996      1997      1998       1999
- -------------------------------------------------------------------------------------------------------
<S>                                                  <C>        <C>       <C>       <C>       <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
(in thousands, except per share data)
Net sales                                            $55,342    $73,260   $76,730    $59,186   $103,458
Cost of sales                                         24,958     33,231    37,130     37,595     53,472
                                                     -------    -------   -------   --------   --------
Gross profit                                          30,384     40,029    39,600     21,591     49,986
                                                     -------    -------   -------   --------   --------
Operating expenses:
  Research, development and engineering                6,330     11,507    14,709     16,670     19,547
  Selling, general and administrative                 11,416     20,900    24,495     24,542     31,784
  Acquired in-process research and development             -          -         -      4,220          -
                                                     -------    -------   -------   --------    -------
    Total operating expenses                          17,746     32,407    39,204     45,432     51,331
                                                     -------    -------   -------   --------    -------

Income (loss) from operations                         12,638      7,622       396   (23,841)    (1,345)
Interest and other income, net                         1,906      2,027     1,486      1,811        743
                                                     -------    -------   -------  ---------    -------
Income (loss) before provision for income taxes       14,544      9,649     1,882   (22,030)      (602)
Provision for income taxes                             4,052      3,184       451        337        247
                                                     -------    -------   -------  ---------    -------
Net income (loss)                                    $10,492     $6,465    $1,431  $(22,367)     $(849)
                                                     =======    =======   =======  =========    =======
Net income (loss) per share:
     Basic                                              $.80       $.46      $.10    $(1.52)     $(.05)
     Diluted                                            $.71       $.42      $.09    $(1.52)     $(.05)

Shares used in computing net income
  (loss) per share:
     Basic                                            13,109     13,997    14,117     14,720     15,730
     Diluted                                          14,854     15,275    15,311     14,720     15,730





As of December 31,                                      1995       1996      1997       1998       1999
- -------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET DATA:
(in thousands)
Cash and cash equivalents                            $14,310    $21,547   $25,583    $11,863    $16,965
Working capital                                       56,425     56,780    56,996     31,034     37,009
Total assets                                          74,089     84,489    84,443     68,120     81,148
Total stockholders' equity                            61,076     69,115    68,184     49,880     52,019
</TABLE>


                                       16
<PAGE>   17

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT
OF OPERATIONS

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

                                    OVERVIEW

        We are a leading supplier of advanced, high-productivity semiconductor
processing equipment used in the fabrication of integrated circuits. We
currently offer Aspen Strip, CVD, RTP, LiteEtch and EpiPro products. We began
operations in 1989 and in 1991 we shipped our first product, the Aspen Strip, a
photoresist removal system. Our current Aspen Strip, CVD, RTP and LiteEtch
product lines are based on a common Aspen platform with a modular,
multi-station, multi-chamber architecture, designed to deliver high
productivity, low cost of ownership and savings of cleanroom space.

        Until 1999, we derived a substantial majority of our sales from our
Aspen Strip systems, with our remaining sales derived from our CVD, RTP,
LiteEtch and Epi systems, as well as spare parts and maintenance services.
During 1999, sales of our CVD systems increased significantly and comprised 27%
of our net sales, with Aspen Strip sales accounting for 60% of our net sales. In
July 1999, we introduced our next generation rapid thermal processing system,
RTPFR3, and the EpiPro 5000 epitaxial silicon deposition system.

        We generally recognize sales upon shipment of a system. From time to
time, however, we allow customers to evaluate systems, and since customers can
return such systems any time with limited or no penalty, we do not recognize the
associated revenue until the evaluation system is accepted by the customer.
Sales to our distributor in Japan are recognized upon shipment with reserves
provided for limited rights of return. Service and maintenance contract revenue,
which to date has been insignificant, is recognized on a straight-line basis
over the service period of the related contract. A provision for the estimated
future cost of system installation and warranty is recorded at the time revenue
is recognized.

        International sales, predominantly to customers based in Europe, Japan
and the Pacific Rim, including Taiwan, Singapore and Korea, accounted for 71% of
total net sales for 1999, 67% of total net sales for 1998 and 65% of total net
sales for 1997. To date, all sales have been denominated in U.S. dollars. We
anticipate that international sales will continue to account for a significant
portion of sales, primarily due to orders from customers in Japan and the
Pacific Rim.

        The local currency is the functional currency for all foreign operations
except those in Japan, where the U.S. dollar is the functional currency. Gains
or losses from translation of foreign operations where the local currencies are
the functional currency are included as a component of stockholders' equity.
Foreign currency transaction gains and losses are recognized in the statement of
operations and have not been material.

        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. The
semiconductor industry suffered a significant downturn beginning in 1998, as a
result of several factors including the economic crisis in Asia, semiconductor
industry over-capacity and reduced profitability for semiconductor manufacturers
resulting from the decreasing prices of personal computers. Accordingly, many
semiconductor manufacturers delayed planned new equipment purchases until 1999,
which significantly impacted our 1998 sales. From the fourth quarter of 1998
through 1999, the industry began to improve, and during that time our sales
increased sequentially from quarter to quarter. The cyclicality and
uncertainties regarding overall market conditions continue to present
significant challenges to us and impair our ability to forecast near term
revenue. Our ability to quickly modify our operations in response to changes in
market conditions is limited.

        In order to support long term growth in our business, we have continued
to increase research and development expenses from previous years. In addition,
selling, general and administrative costs in 1999 increased from 1998 as sales
continued to increase. We are still dependent upon increases in sales in order
to achieve profitability. If our sales do not increase, our current operating
expenses could prevent us from increasing profitability and adversely affect our
financial results.

        On July 24, 1998, we completed our acquisition of Concept Systems
Design, Inc., a supplier of epitaxial systems. The merger was accounted for as a
purchase at a price of $4,689,000, which included $650,000 of estimated
acquisition-related costs. In connection with the merger, we issued 795,138
shares of our common stock to the former stockholders of Concept. The purchase
price was

                                       17
<PAGE>   18

allocated to assets acquired and liabilities assumed based on the fair value of
Concept's current assets and liabilities, which we believe approximated their
book value, the estimated fair value of property and equipment and an
independent appraisal for all other identifiable assets. The excess of the
purchase price over the net tangible and intangible assets acquired and
liabilities assumed was allocated to goodwill.

        In the first quarter of 1999, a preacquisition contingency was resolved
which reduced the liabilities assumed from Concept by approximately $2.2
million. Under the provisions of Statement of Financial Accounting Standards No.
38, this has been recorded by us in the first quarter of 1999 on a prospective
basis as an elimination of previously recorded goodwill and a pro-rata reduction
of the balance to the acquired developed technology, workforce and property and
equipment. The acquired developed technology and workforce are recorded on the
balance sheet as other assets and will be amortized on a straight-line basis
over periods ranging from three to seven years. The acquired in-process research
and development was expensed at the time of acquisition as a one-time charge.
The acquisition agreement provides for the contingent distribution of 100,000
additional shares of our common stock if certain revenue levels are achieved
prior to July 24, 2000. Additional shares issued, if any, will be valued at the
fair value of the shares at the date of issue and will result in additional
goodwill.

RESULTS OF OPERATIONS

        The following table sets forth selected consolidated financial data for
the periods indicated, expressed as a percentage of net sales:

<TABLE>
<CAPTION>
                                                               YEAR ENDED DECEMBER 31,
                                                         --------------------------------
<S>                                                      <C>          <C>           <C>
                                                          1997        1998           1999
                                                         -----        -----         -----
Net sales ........................................       100.0%       100.0%        100.0%
Cost of sales ....................................        48.4         63.5          51.7
                                                         -----        -----         -----
Gross margin .....................................        51.6         36.5          48.3
                                                         -----        -----         -----
Operating expenses:
  Research, development and engineering ..........        19.2         28.2          18.9
  Selling, general and administrative ............        31.9         41.5          30.7
  Acquired in-process research and development ...          --          7.1            --
                                                         -----        -----         -----
Income (loss) from operations ....................          .5        (40.3)         (1.3)
Interest and other income, net ...................         2.0          3.1            .7
                                                         -----        -----         -----
Income (loss) before provision for income taxes ..         2.5        (37.2)          (.6)
                                                         -----        -----         -----
Net income (loss) ................................         1.9%       (37.8)%         (.8)%
                                                         =====        =====         =====
</TABLE>


YEARS ENDED DECEMBER 31, 1999 AND 1998

        Net Sales. Our net sales for the year ended December 31, 1999 were
$103.5 million, representing an increase of $44.3 million, or 74.8%, over net
sales of $59.2 million for the year ended December 31, 1998. Net sales increased
in 1999 primarily as a result of a 53.1% increase in unit shipments and a 16.2%
increase in average selling prices.

        Until 1999, our sales consisted principally of single and dual chamber
Aspen Strip products and to a lesser extent, CVD, RTP and LiteEtch systems,
spare parts and service revenue. During 1999, sales of our Aspen CVD accounted
for 26.6% of net sales. The increase in average selling prices has resulted
primarily from a change in sales mix to CVD, RTP and LiteEtch systems, which
generally carry higher selling prices than the Aspen Strip systems.

        Gross Margin. Gross profit was $50.0 million for the year ended December
31, 1999, representing 48.3% of net sales, up from $21.6 million, or 36.5% of
net sales, for the year ended December 31, 1998. Our cost of sales includes
labor, materials and overhead. Gross margin increased in 1999 primarily due to
favorable manufacturing overhead efficiencies, as the number of systems shipped
increased 53.1% in 1999 compared to 1998.

        Our gross margin has varied over the years and will continue to vary
based on multiple factors including our product mix, economies of scale,
overhead absorption levels, and costs associated with the introduction of new
products. Our gross margin on international sales, other than sales to Marubeni,
have been substantially the same as domestic sales. Sales to Marubeni typically
carry a lower gross margin, as Marubeni has been primarily responsible for sales
and support costs in Japan. We are in the process of terminating our
distribution relationship with Marubeni and shifting to a direct sales model in
Japan. We anticipate this process to be completed in the first half of 2000.

        Research, Development and Engineering. Research, development and
engineering expenses were $19.5 million, or 18.9% of net sales, for the year
ended December 31, 1999, compared to $16.7 million, or 28.2% of net sales, for
the year ended December 31, 1998. The increase was primarily due to compensation
and related benefits, which increased to $9.8 million in 1999 from $8.6 million
in

                                       18
<PAGE>   19

1998, and depreciation expense, which increased to $2.3 million in 1999 from
$1.9 million in 1998. The increase in compensation and related benefits expense
was due to increased personnel required to support our anticipated long term
future growth. The increase in depreciation expense was due to additional fixed
assets as a result of our acquisition of Concept in July 1998. The decrease in
research, development and engineering expense as a percentage of net sales in
1999 compared to 1998 was primarily attributable to increased sales in 1999.

        Selling, General and Administrative. Selling, general and administrative
expenses were $31.8 million, or 30.7% of net sales, for the year ended December
31, 1999, compared with $24.5 million, or 41.5% of net sales, for the year ended
December 31, 1998. The increase was primarily due to compensation and related
benefits, which increased to $22.4 million in 1999 from $15.2 million in 1998
due to increased personnel during 1999 and the reimplementation during the first
quarter of 1999 of compensation programs that had been reduced or eliminated as
part of the overall cost cutting measures implemented by management in the
second quarter of 1998. The decrease in selling, general and administrative
expenses as a percentage of net sales in 1999 compared to 1998 was primarily
attributable to increased net sales in 1999.

        Acquired In-Process Research and Development. In 1998, in connection
with our acquisition of Concept, we allocated $4.2 million to in-process
research and development, which we expensed as a one-time charge, and $6.9
million to other intangible assets.

        The value assigned to in-process research and development was determined
by identifying research projects in areas for which technological feasibility
had not been established. These included the Concept EpiPro 5000 system and a
single wafer Epi system. The value was determined by estimating the expected
cash flows from the projects, taking into consideration an estimate of future
obsolescence of the technology once commercially viable, applying a percentage
of completion and then discounting the net cash flows to their present value. We
believe that the efforts to complete the in-process research and development
projects will consist of internally staffed engineers and will be completed in
2001. The estimated costs to complete the research and development is
approximately $1.7 million. There is substantial risk associated with the
completion of each project and we cannot be certain that any of the projects
will meet with technological or commercial success.

        The percentage of completion for each project was determined using
management estimates of time and dollars spent as compared to time and dollars
that were expected to be required to complete the project. The degree of
difficulty of the portion of each project completed as of July 24, 1998 was also
compared to the estimated remaining research and development to be completed to
bring each project to technical feasibility. At July 24, 1998, the percentage of
completion for the Concept EpiPro 5000 was estimated at 80% and the percentage
of completion for the single wafer Epi system was estimated at 50%.

        Tax Provision. We recorded a tax provision of $247,000 for the year
ended December 31, 1999 compared to $337,000 for the year ended December 31,
1998. We recognized provision for income taxes at an effective tax rate of
(41.0)% during 1999 and (1.5)% during 1998. In 1999 and 1998 we did not
recognize any tax benefits from our operating losses. The 1999 and 1998 income
tax provision primarily relates to foreign income tax. FASB Statement No. 109
provides for the recognition of deferred tax assets if realization of such
assets is more likely than not. Based upon available data, which includes our
historical operating performance and the reported cumulative net losses in prior
years, we have provided a full valuation allowance against our net deferred tax
assets as the future realization of the tax benefit is not sufficiently assured.
We intend to evaluate the realization of the deferred tax assets on a quarterly
basis.

YEARS ENDED DECEMBER 31, 1998 AND 1997

        Net Sales. Our net sales of $59.2 million for the year ended December
31, 1998 represented a decrease of $17.5 million, or 22.8%, from net sales of
$76.7 million for the year ended December 31, 1997. The decrease was primarily
the result of a 32.7% decrease in unit shipments, partially offset by a 6.6%
increase in average selling prices.

        Gross Margin. Gross profit was $21.6 million for the year ended December
31, 1998, representing 36.5% of net sales, compared to gross profit of $39.6
million, representing 51.6% of net sales, for the year ended December 31, 1997.
The lower gross margin in 1998 compared to 1997 was primarily attributable to
overhead inefficiencies caused by lower production volumes, as well as a
one-time inventory write-down.

        Research, Development and Engineering. Research, development and
engineering expenses for the year ended December 31, 1998 were $16.7 million, or
28.2% of net sales, and increased from $14.7 million, or 19.2% of net sales, for
the year ended December 31, 1997. The increase was primarily due to compensation
and benefits, which increased to $8.6 million in 1998 from $7.9 million in 1997,
engineering project materials, which increased to $3.3 million in 1998 from $3.1
million in 1997, and depreciation, which

                                       19
<PAGE>   20

increased to $1.9 million in 1998 from $1.4 million in 1997. The increase in
compensation expense was primarily due to increased personnel required to
support our anticipated long term future growth, including the support of our
multi-product strategy. The increase in engineering project materials was due to
ongoing and new product development. The increase in depreciation expense was
due to the additional fixed assets acquired from the Concept acquisition. The
increase in research, development and engineering expense as a percentage of net
sales in 1998 compared to 1997 was primarily attributable to lower sales in
1998.

        Selling, General and Administrative. Selling, general and administrative
expenses for the year ended December 31, 1998 were $24.5 million, or 41.5% of
net sales, compared to expenses of $24.5 million, or 31.9% of net sales, for the
year ended December 31, 1997. Cost cutting measures implemented in the second
quarter of 1998 were offset by increased expenditures relating to the acquired
Concept workforce and related overhead. Salaries, commissions and related
expenses remained constant at $15.2 million in 1997 and 1998. Building and
utilities expenses increased to $3.1 million in 1998 from $2.0 million in 1997.
The increase in building and utilities expenses was due to an additional 31,000
square foot facility leased at the end of 1997, which was vacated in the third
quarter of 1998. The increase in building and utilities charges was offset by
nominal decreases in advertisement and promotion and travel and entertainment
expenses in 1998.

        Tax provision. We recorded a tax provision of $337,000 for the year
ended December 31, 1998 compared to $451,000 for the year ended December 31,
1997. We recognized provision for income taxes at an effective rate of (1.5)%
during 1998 and 24.0% during 1997. The provision for income taxes in 1998
consists primarily of foreign taxes. FASB Statement No. 109 provides for the
recognition of deferred tax assets if realization of such assets is more likely
than not. Based upon available data, we have provided a full valuation allowance
against our December 31, 1998 net deferred tax assets as the future realization
of the tax benefit is not sufficiently assured. We intend to evaluate the
realization of the deferred tax assets on a quarterly basis. The 1997 tax rate
is less than the federal statutory rate as a result of benefits from our foreign
sales corporation and the research and development tax credit.

QUARTERLY RESULTS OF OPERATIONS

        The following tables set forth our unaudited consolidated statement of
operations data for each of the eight quarterly periods ended December 31, 1999.
You should read this information in conjunction with our consolidated financial
statements and related notes appearing elsewhere in this prospectus. 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 quarters presented. You should not draw
any conclusions about our future results from the operating results for any
quarter.

<TABLE>
<CAPTION>
                                                                                   QUARTER ENDED
                                         --------------------------------------------------------------------------------------
                                         MAR. 29,     JUNE 28,     SEPT. 27,    DEC. 31,      MAR. 28     JUNE 27,     SEPT. 26,
                                           1998         1998         1998         1998         1999         1999         1999
                                         --------     --------     --------     --------     --------     --------     --------
                                                                                   (IN THOUSANDS)
<S>                                      <C>          <C>          <C>          <C>          <C>          <C>          <C>
CONSOLIDATED STATEMENT
  OF OPERATIONS
Net sales ...........................    $ 20,248     $ 15,649     $  9,420     $ 13,869     $ 14,320     $ 24,128     $ 29,189
Cost of sales .......................      11,173        8,448        8,920        9,054        7,076       12,748       15,171
                                         --------     --------     --------     --------     --------     --------     --------
Gross profit ........................       9,075        7,201          500        4,815        7,244       11,380       14,018
                                         --------     --------     --------     --------     --------     --------     --------
Operating expenses:
  Research, development and
    engineering .....................       4,501        3,770        4,107        4,292        3,898        4,525        5,297
  Selling, general and administrative       6,725        5,643        6,294        5,880        6,031        7,106        8,567
  Acquired in-process research and
    development .....................          --           --        4,220           --           --           --           --
                                         --------     --------     --------     --------     --------     --------     --------
    Total operating expenses ........      11,226        9,413       14,621       10,172        9,929       11,631       13,864
                                         --------     --------     --------     --------     --------     --------     --------
Income (loss) from operations .......      (2,151)      (2,212)     (14,121)      (5,357)      (2,685)        (251)         154
Interest and other income, net ......         481          508          431          391          293          133          221
                                         --------     --------     --------     --------     --------     --------     --------
Income (loss) before provision for
    income taxes ....................      (1,670)      (1,704)     (13,690)      (4,966)      (2,392)        (118)         375
Provision for (benefit from)
    income taxes ....................        (450)        (459)       1,109          137           49           68           59
                                         --------     --------     --------     --------     --------     --------     --------
Net income (loss) ...................    $ (1,220)    $ (1,245)    $(14,799)    $ (5,103)    $ (2,441)    $   (186)    $    316
                                         ========     ========     ========     ========     ========     ========     ========
Net income (loss) per share:
  Basic .............................    $   (.09)    $   (.09)    $  (1.00)    $   (.33)    $   (.16)    $   (.01)    $    .02
  Diluted ...........................    $   (.09)    $   (.09)    $  (1.00)    $   (.33)    $   (.16)    $   (.01)    $    .02
Shares used in computing
Net income (loss) per share:
  Basic .............................      14,254       14,474       14,839       15,315       15,423       15,601       15,887
  Diluted ...........................      14,254       14,474       14,839       15,315       15,423       15,601       17,191
</TABLE>

<TABLE>

                                           DEC. 31,
                                            1999
                                          --------
<S>                                       <C>
CONSOLIDATED STATEMENT
  OF OPERATIONS
Net sales ...........................     $ 35,821
Cost of sales .......................       18,477
                                          --------
Gross profit ........................       17,344
                                          --------
Operating expenses:
  Research, development and
    engineering .....................        5,827
  Selling, general and administrative       10,080
  Acquired in-process research and
    development .....................           --
                                          --------
    Total operating expenses ........       15,907
                                          --------
Income (loss) from operations .......        1,437
Interest and other income, net ......           96
                                          --------
Income (loss) before provision for
    income taxes ....................        1,533
Provision for (benefit from)
    income taxes ....................           71
                                          --------
Net income (loss) ...................     $  1,462
                                          ========
Net income (loss) per share:
  Basic .............................     $    .09
  Diluted ...........................     $    .08
Shares used in computing
Net income (loss) per share:
  Basic .............................       16,055
  Diluted ...........................       17,552
</TABLE>


                                       20
<PAGE>   21
LIQUIDITY AND CAPITAL RESOURCES

        Our cash and cash equivalents and short term investments were $17.0
million at December 31, 1999, a decrease of $3.0 million from cash and cash
equivalents and short term investments of $20.0 million held as of December 31,
1998. We had $3.0 million outstanding under our line of credit and no long term
debt at December 31, 1999. Stockholders' equity at December 31, 1999 was
approximately $52.0 million.

        Sources of cash increased by $5.1 million in 1999. Net cash used in
operating activities was $9.5 million for the year ended December 31, 1999 and
$5.4 million for the year ended December 31, 1998. The net cash used in
operations in 1999 was primarily attributable to the net loss of $800,000, an
increase in accounts receivable of $11.9 million and an increase in inventories
of $14.8 million, offset by non-cash depreciation and amortization of
intangibles of $4.8 million, a decrease in prepaid expenses and refundable
income taxes of $2.7 million, an increase in accounts payable of $5.1 million
and an increase in accrued liabilities of $5.4 million. The net cash used in
operations in 1998 was primarily attributable to the net loss of $22.4 million,
offset by non-cash depreciation, in-process research and development and
deferred taxes of $12.9 million and a decrease in inventories of $10.7 million.
The net cash provided by operations in 1997 was primarily attributable to net
income of $1.4 million, non cash depreciation charges of $2.9 million and a
decrease in accounts receivable balances of $1.2 million, offset by an increase
in inventories of $6.1 million.

        Net cash provided by investing activities in the year ended December 31,
1999 included the collection of a $3.7 million note receivable from our chief
executive officer, and the sale of $8.1 million of short term investments,
offset by the purchase of $3.3 million of property and equipment. Net cash used
in investing activities in 1998 was $8.4 million, primarily from retirement of
$4.0 million of debt acquired in the acquisition of Concept and the issuance of
a note receivable to our chief executive officer for $3.1 million. Net cash
provided by investing activities in 1997 was primarily attributable to the sales
and maturities of short term investments of $24.5 million, partially offset by
purchases of short term investments of $16.5 million and the acquisition of
property and equipment of $4.7 million.

        Net cash provided by financing activities was $6.0 million in 1999,
primarily from the $3.0 million net proceeds from the issuance of common stock
under our employee stock purchase plan and our stock option plan and the
borrowing of $3.0 million against our $15.0 million line of credit. Net cash
used in financing activities in 1998 and 1997 was primarily from the repurchase
of our common stock, partially offset by net proceeds from the issuance of
common stock under our employee stock purchase plan and our stock option plan.

        Our board of directors has authorized us to repurchase from time to time
in the open market up to 1,000,000 shares of our common stock, through the year
2000. As of December 31, 1999, we had repurchased 274,800 shares. The purpose of
the repurchase program is to acquire shares to fund our stock based employee
benefit programs, including our employee stock purchase plan and our stock
option plan. We do not intend to repurchase any additional shares of our stock
under this repurchase program.

        During the third quarter of 1998, we extended a one year loan to Brad
Mattson, our chief executive officer, in the amount of $3.1 million. The note,
which was approved by our non-executive directors, was a full recourse note and
was fully collateralized by 2.2 million shares of our common stock owned by Mr.
Mattson. The interest rate on the loan was 8%. During 1999, we agreed to extend
the loan for an additional six months and increased the note to $3.7 million,
which included accrued interest of approximately $300,000 and an additional
$300,000 loaned to Mr. Mattson. The note, including all accrued interest, was
repaid in full during the quarter ended December 31, 1999.

        During 1999 we entered into a one year revolving line of credit with a
bank in the amount of $15.0 million. This line of credit expires in July 2000.
All borrowings under this line of credit bear interest at a per annum rate equal
to the lender's prime rate, which was 8.5% at December 31, 1999. The line of
credit is secured by our accounts receivable and other tangible assets. As of
December 31, 1999, we had borrowed $3.0 million against the revolving line of
credit. Our revolving credit line requires us to maintain certain quarterly
financial covenants, including a minimum quick ratio and minimum tangible net
worth. We were in compliance with all of our financial covenants at December 31,
1999.

        On January 28, 2000 we filed a registration statement with the
Securities and Exchange Commission relating to a proposed underwritten public
offering of up to 3.45 million shares of our common stock. We expect to use the
net proceeds of approximately $100 million for general corporate purposes,
principally working capital and capital expenditures. We currently anticipate
that the net proceeds from the offering discussed above, together with our
current cash, cash equivalents and available credit facilities, will be
sufficient to meet our anticipated cash needs for working capital and capital
expenditures for at least the next 12 months. However, we may need to raise
additional funds in future periods through public or private financings, or
other sources, to



                                       21

<PAGE>   22

fund our operations and any potential acquisitions. We may not be able to obtain
adequate or favorable financing when needed. Failure to raise capital when
needed could harm our business. If we raise additional funds through the
issuance of equity securities, the percentage ownership of our stockholders
would be reduced. Furthermore, these equity securities might have rights,
preferences or privileges senior to our common stock.

YEAR 2000 READINESS DISCLOSURE

        We have designed our products to be year 2000 compliant, and as a result
we have not experienced year 2000 problems related to our products. The majority
of the computer software and hardware that we use in our internal operations did
not require replacement or modification as a result of the year 2000 issue. We
believe that our significant vendors and service providers are year 2000
compliant and have not, to date, been made aware that any of our significant
vendors or service providers have experienced year 2000 disruptions in their
systems. Accordingly, we do not anticipate incurring material expenses or
experiencing any material operational disruptions as a result of any year 2000
problems.

RECENT ACCOUNTING PRONOUNCEMENTS

        In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes new standards of
accounting and reporting for derivative instruments and hedging activities. SFAS
133 requires that all derivatives be recognized at fair value in the statement
of financial position, and that the corresponding gains or losses be reported
either in the statement of operations or as a component of comprehensive income,
depending on the type of hedging relationship that exists. SFAS 133 is effective
for fiscal years beginning after June 15, 2000 and cannot be applied
retroactively. The effect of SFAS 133 is not expected to be material to our
financial statements.

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

        In this Annual Report on Form 10-K and from time to time, the Company
may make forward looking statements regarding, among other matters, the
Company's future strategy, product development plans, productivity gains of its
products, financial performance and growth. The forward-looking statements are
made pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Forward looking statements address matters which are subject
to a number of risks and uncertainties, including the following:

OUR SALES REFLECT THE CYCLICALITY OF THE SEMICONDUCTOR INDUSTRY, WHICH CAN CAUSE
OUR OPERATING RESULTS TO FLUCTUATE SIGNIFICANTLY AND COULD CAUSE US TO FAIL TO
ACHIEVE ANTICIPATED SALES

        Our business depends in significant part upon capital expenditures by
manufacturers of semiconductor devices, including manufacturers that are opening
new or expanding existing fabrication facilities. The level of capital
expenditures by these manufacturers of semiconductor devices depends upon the
current and anticipated market demand for such devices and the products
utilizing such devices. The semiconductor industry is highly cyclical. The
industry has in the past, and will likely in the future, experience periods of
oversupply that result in significantly reduced demand for capital equipment,
including our systems. When these periods occur, our operating results and
financial condition are adversely affected. For instance, we were affected by a
severe downturn in the semiconductor industry in 1998, during which our sales
decreased for the first three consecutive quarters of 1998 before increasing in
the fourth quarter of 1998 and throughout 1999.

        We anticipate that a significant portion of new orders will depend upon
demand from semiconductor manufacturers and independent foundries who build or
expand large fabrication facilities. If existing fabrication facilities are not
expanded or new facilities are not built, demand for our systems may not develop
or increase, and we may be unable to generate significant new orders for our
systems. If we are unable to develop new orders for our systems, we will not
achieve anticipated net sales levels. Any future downturns or slowdowns in the
semiconductor industry will materially and adversely affect our net sales and
operating results.



                                       22
<PAGE>   23

MOST OF OUR REVENUE COMES FROM A SMALL NUMBER OF LARGE SALES, AND ANY DELAY IN
THE TIMING OF INDIVIDUAL SALES COULD CAUSE OUR OPERATING RESULTS TO FLUCTUATE
FROM QUARTER TO QUARTER

        A delay in a shipment near the end of a quarter may cause net sales in
that quarter to fall below our expectations and the expectations of market
analysts or investors. We derive most of our revenues from the sale of a
relatively small number of expensive systems. The list prices on these systems
range from $500,000 to over $2.2 million. At our current revenue level, each
sale, or failure to make a sale, could have a material effect on us. Our lengthy
sales cycle, coupled with customers' competing capital budget considerations,
make the timing of customer orders uneven and difficult to predict. In addition,
our backlog at the beginning of a quarter typically does not include all orders
required to achieve our sales objectives for that quarter. As a result, our net
sales and operating results for a quarter depend on us shipping orders as
scheduled during that quarter as well as obtaining new orders for systems to be
shipped in that same quarter. Any delay in scheduled shipments or in shipments
from new orders would materially and adversely affect our operating results for
that quarter, which could cause our stock price to decline.

OUR QUARTERLY FINANCIAL RESULTS FLUCTUATE SIGNIFICANTLY AND MAY FALL SHORT OF
ANTICIPATED LEVELS, WHICH COULD CAUSE OUR STOCK PRICE TO DECLINE

        We base our operating expenses on anticipated revenue levels, and a
substantial percentage of our expenses are fixed in the short term. 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.

        Our quarterly revenue and operating results have varied significantly in
the past and may vary significantly in the future due to a number of factors,
including:

        -      market acceptance of our systems and the products of our
               customers;

        -      substantial changes in revenues from significant customers;

        -      increased manufacturing overhead expenses due to reductions in
               the number of systems manufactured;

        -      timing of announcement and introduction of new systems by us and
               by our competitors;

        -      sudden changes in component prices or availability;

        -      changes in product mix;

        -      delays in orders due to customer financial difficulties;

        -      manufacturing inefficiencies caused by uneven or unpredictable
               order patterns, reducing our gross margins; and

        -      higher fixed costs due to increased levels of research and
               development and expansion of our worldwide sales and marketing
               organization.

        Due to the foregoing factors, we believe that period-to-period
comparisons of our operating results should not be relied upon as an indicator
of our future performance.

WE HAVE INCURRED NET OPERATING LOSSES FOR THE PRIOR TWO YEARS, WE MAY NOT
ACHIEVE OR MAINTAIN PROFITABILITY ON AN ANNUAL BASIS, AND IF WE DO NOT, WE MAY
NOT UTILIZE DEFERRED TAX ASSETS

        We incurred net losses of approximately $22.4 million for the year ended
December 31, 1998 and $800,000 for the year ended December 31, 1999. We expect
to continue to incur significant research and development and selling, general
and administrative expenses. We will need to generate significant increases in
net sales to achieve and maintain profitability on an annual basis, and we may
not be able to do so. In addition, because of these factors, through December
31, 1999, we had not been in a position to utilize our deferred tax assets. Our
ability to realize our deferred tax assets in future periods will depend on our
ability to achieve and maintain profitability on an annual basis. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for a further discussion of our net operating losses.

                                       23
<PAGE>   24

YEAR-TO-YEAR CHANGES IN OUR LIST OF MAJOR CUSTOMERS MAKE IT DIFFICULT TO
FORECAST OUR REVENUE AND ACHIEVE OUR SALES GOALS

        During 1999, one customer, Samsung, accounted for approximately 20% of
our net sales. During 1998, we had no individually significant customers,
although sales to our Japanese distributor, Marubeni, constituted 16% of our net
sales. During 1997, one customer, Taiwan Semiconductor Manufacturing Company,
accounted for approximately 11% of our net sales. Although the composition of
the group comprising our largest customers has varied from year to year, our top
ten customers accounted for 63% of our net sales in 1999, 56% in 1998 and 60% in
1997. Our systems represent major capital investments that our customers and
potential customers purchase or replace infrequently. Therefore, our list of
major customers changes substantially from year to year, and we cannot predict
that a major customer in one year will make significant purchases from us in
future years. Accordingly, it is difficult for us to accurately forecast our
revenues and operating results from year to year. While we actively pursue new
customers, if we are unable to successfully make significant sales to new
customers or sell additional systems to existing customers, we may not achieve
anticipated net sales levels and our business and operating results would
suffer.

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 manufacturing capacity. That decision typically involves a
significant capital commitment by our customers. Accordingly, the purchase of
our systems typically involves time consuming internal procedures associated
with the evaluation, testing, implementation and introduction of new
technologies into our customers' manufacturing facilities. For many potential
customers, an evaluation as to whether new semiconductor manufacturing equipment
is needed typically occurs infrequently. Following an evaluation by the customer
as to whether our systems meet its qualification criteria, we have experienced
in the past and expect to experience in the future, delays in finalizing system
sales while the customer evaluates and receives approval for the purchase of our
systems and constructs a new facility or expands an existing facility.

        Due to these factors, our systems typically have a lengthy sales cycle
during which we may expend substantial funds and management effort. The time
between our first contact with a customer and the customer placing its first
order typically lasts from nine to twelve months and is often even longer. This
lengthy sales cycle makes it difficult to accurately forecast future sales and
may cause our quarterly and annual revenue and operating results to fluctuate
significantly from period to period. If anticipated sales from a particular
customer are not realized in a particular period due to this lengthy sales
cycle, our operating results may be adversely affected.

WE ARE HIGHLY DEPENDENT ON OUR INTERNATIONAL SALES, PARTICULARLY SALES IN ASIAN
COUNTRIES, AND IF WE ARE UNABLE TO SUSTAIN AND INCREASE OUR INTERNATIONAL SALES,
WE MAY NOT ACHIEVE ANTICIPATED REVENUE GROWTH

        Asia is a particularly important region for our business. Sales to
Taiwan, Japan and other Asian countries accounted for 59% of our total net sales
in 1999, 50% in 1998 and 60% in 1997. All international sales accounted for 71%
of our total net sales in 1999, 67% in 1998, and 65% in 1997. We anticipate that
international sales will continue to account for a significant portion of our
net sales. Because of our dependence upon international sales in general and on
sales to Taiwan, Japan and other Asian countries in particular, we are at risk
to the effects of regional economic problems. Asian economies have been highly
volatile and prone to recession in recent years. In particular, our 1998 net
sales declined during a severe industry downturn caused in large part by
recessions in several Asian countries.

        Our international sales are subject to a number of additional risks,
including:

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

        -      exchange rate volatility;

        -      political and economic instability, particularly in Asia;

        -      difficulties in accounts receivable collections;

        -      extended payment terms beyond those customarily used in the
               United States;

                                       24
<PAGE>   25

        -      difficulties in managing distributors or representatives;

        -      difficulties in staffing and managing foreign subsidiary
               operations; and

        -      potentially adverse tax consequences.

        Our sales to date have been denominated in U.S. dollars. If it becomes
necessary for us to make sales denominated in foreign currencies, we will become
more exposed to the risk of currency fluctuations. Our products become less
price competitive in countries with currencies that are declining in value in
comparison to the dollar. This could cause us to lose sales or force us to lower
our prices, which would reduce our gross margins.

WE ARE ESTABLISHING A DIRECT SALES ORGANIZATION IN JAPAN AND TERMINATING OUR
JAPANESE DISTRIBUTOR, WHICH COULD RESULT IN LOST SALES OR INCREASED RISKS TO OUR
BUSINESS IN JAPAN

        As part of our original strategy for penetrating the Japanese market, we
established a distributor relationship with Marubeni Solutions Corp. in 1990. In
1999, we shifted our strategy in Japan to a direct sales model. For the year
ended December 31, 1998, sales to Marubeni accounted for 16% of our net sales.
We are in the process of terminating our distribution relationship with Marubeni
and establishing our own direct sales force in Japan. For the year ended
December 31, 1999, sales to Marubeni accounted for 10% of our net sales. We
believe that the transition to direct sales will be completed during the first
half of 2000. Although we intend to continue to invest significant resources in
Japan, including the hiring of additional personnel to support our direct sales
effort, we may not be able to maintain or increase our sales to the Japanese
semiconductor industry. We may miss sales opportunities or lose competitive
sales as we transition to this direct sales model, or Japanese customers and
potential customers may be unwilling to purchase our systems from us directly.
When we make sales directly to customers in Japan, we expect that payment terms
may be as long as 180 days from shipment, compared to 30 days from shipment for
sales in our other regions. Such a delay would negatively impact our cash flows.

MOST OF OUR SALES ARE CURRENTLY CONCENTRATED IN ASPEN STRIP AND CVD SYSTEMS, AND
WE DEPEND UPON CONTINUED MARKET ACCEPTANCE OF THESE PRODUCTS; IF WE ARE UNABLE
TO INCREASE SALES OF OUR OTHER PRODUCTS, WE MAY NOT ACHIEVE ANTICIPATED GROWTH
OF NET SALES

        For the year ended December 31, 1999, sales of Aspen Strip and CVD
systems constituted 87% of our net sales. We expect that revenue from these
products will continue to account for a substantial majority of our net sales
for the foreseeable future. Accordingly, continued market acceptance of these
systems is critical to our future success. Market acceptance of our Aspen Strip
and CVD systems is affected by a number of factors including technological
innovation, productivity and cost of ownership. Many of these factors are beyond
our control. Our failure to maintain or increase current levels of market
acceptance for Aspen Strip and CVD systems could significantly impair our net
sales growth.

        Our future sales will also depend upon achieving broad market acceptance
of our Aspen RTP systems, Aspen LiteEtch systems, EpiPro systems and other
future products and services that we might offer. The markets for these newer
products, especially products such as our Aspen III Strip, Aspen III CVD and
Aspen III LiteEtch, which process 300 millimeter wafers, are still developing
and require our substantial investment in development and sales efforts. If the
markets for these products do not develop as anticipated, or if we are unable to
obtain or increase orders in these markets, we may not realize an adequate
return on the investment made in the development of these new products, and we
may not achieve our anticipated revenue growth.

WE MAY NOT ACHIEVE ANTICIPATED REVENUE GROWTH IF WE ARE NOT SELECTED AS "VENDOR
OF CHOICE" FOR NEW OR EXPANDED FABRICATION FACILITIES AND IF OUR SYSTEMS AND
PRODUCTS DO NOT ACHIEVE BROADER MARKET ACCEPTANCE

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

        Once a semiconductor manufacturer selects a particular vendor's capital
equipment, the manufacturer generally relies for a significant period of time
upon equipment from this vendor of choice for the specific production line
application. In addition, the semiconductor manufacturer frequently will attempt
to consolidate its other capital equipment requirements with the same vendor.
Accordingly, we may face narrow windows of opportunity to be selected as the
"vendor of choice" by substantial new customers. It may be difficult for us to
sell to a particular customer for a significant period of time once that
customer selects a competitor's product,

                                       25
<PAGE>   26

and we may not be successful in obtaining broader acceptance of our systems and
technology. To date, only our strip and CVD products have gained widespread
market acceptance. If we are unable to achieve broader market acceptance of our
systems and technology, we may be unable to grow our business and our operating
results and financial condition will be adversely affected.

UNLESS WE CAN CONTINUE TO DEVELOP AND INTRODUCE NEW SYSTEMS THAT COMPETE
EFFECTIVELY ON THE BASIS OF PRICE AND PERFORMANCE, WE MAY LOSE FUTURE SALES AND
CUSTOMERS, OUR BUSINESS MAY SUFFER AND OUR STOCK PRICE MAY DECLINE

        Because of continual changes in the markets in which we and our
customers compete, our future success will depend in part upon our ability to
continue to improve our systems and our technologies. These markets are
characterized by rapidly changing technology, evolving industry standards and
continuous improvements in products and services.

        Due to the continual changes in these markets, our success will also
depend upon our ability to develop new technologies and systems that compete
effectively on the basis of price and performance and that adequately address
customer requirements. In addition, we must adapt our systems and processes to
technological changes and to support emerging target market industry standards.
The success of any new systems we introduce is dependent on a number of factors.
These factors include timely completion of new system designs and market
acceptance. We may not be able to improve our existing systems or develop new
technologies or systems in a timely manner. In particular, the transition of the
market to 300 millimeter wafers will present us with both an opportunity and a
risk. To the extent that we are unable to introduce 300 millimeter systems which
meet customer requirements on a timely basis, our business could be harmed.

WE MAY NOT BE ABLE TO CONTINUE TO SUCCESSFULLY COMPETE IN THE HIGHLY COMPETITIVE
SEMICONDUCTOR INDUSTRY

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

        -      system performance;

        -      cost of ownership;

        -      size of installed base;

        -      breadth of product line; and

        -      customer support.

        The following characteristics of our major competitors' systems give
them a competitive advantage over us, particularly with their CVD systems:

        -      broader product lines;

        -      longer operating history;

        -      greater experience with high volume manufacturing;

        -      broader name recognition;

        -      substantially larger customer bases; and

        -      substantially greater financial, technical and marketing
               resources.

        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 and sale 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.

                                       26
<PAGE>   27

WE DEPEND UPON A LIMITED NUMBER OF SUPPLIERS FOR MANY 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 manufacture many
of the components and subassemblies of our Aspen systems. We obtain many of
these components and subassemblies from a sole source or a limited group of
suppliers. Because of our 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. In addition, we may have reduced control
over pricing and timely delivery of components.

        In addition, we often quote prices to our customers and accept customer
orders for our products prior to purchasing components and subassemblies from
our suppliers. If our suppliers increase the cost of components or
subassemblies, we may not have alternative sources of supply and may not be able
to raise 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. As a result, we have in
the past and may in the future experience delays or shortages. 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 cause us to suffer harm to our reputation.

TO EFFECTIVELY MANAGE OUR GROWTH AND EXPANSION, WE WILL NEED TO IMPROVE AND
IMPLEMENT NEW SYSTEMS, PROCEDURES AND CONTROLS

        We have recently experienced a period of rapid growth and expansion that
has placed a significant strain on our management information systems and our
administrative, financial and operational resources. We are currently
undertaking a significant expansion of our operations to support increased sales
levels as a result of the recent improvement in the semiconductor industry,
including the expansion of our international operations and a transition to
direct sales operations in Japan. We are making additional significant
investments in research and development to support product development. We have
grown from 349 employees at December 31, 1998, to 443 employees at December 31,
1999 and plan to further increase our total personnel. This expansion will
continue to result in substantial demands on our management resources. To
accommodate continued anticipated growth and expansion, we will be required to:

        -      improve existing, and implement new, operational and financial
               systems, procedures and controls;

        -      hire, train, manage, retain and motivate qualified personnel; and

        -      obtain additional facilities and suppliers.

These measures may place additional burdens on our management and our internal
resources.

IF WE DO NOT HAVE SUFFICIENT EVALUATION SYSTEMS AVAILABLE TO OUR CUSTOMERS, WE
MAY MISS SALES OPPORTUNITIES

        We have experienced increased interest in evaluation of our chemical
vapor deposition products. In the past, during periods of high growth, we have
been constrained by a lack of available CVD evaluation units for timely delivery
to prospective customers. If we are not able to make a sufficient number of
evaluation systems available when requested, potential customers may not be able
to evaluate our products before making equipment purchase decisions and we may
miss opportunities to make sales, causing our growth to be adversely affected.

WE ARE HIGHLY DEPENDENT ON OUR KEY PERSONNEL TO MANAGE OUR BUSINESS AND THEIR
KNOWLEDGE OF OUR BUSINESS, MANAGEMENT SKILLS AND TECHNICAL EXPERTISE WOULD BE
DIFFICULT TO REPLACE

        Our success depends to a large extent upon the efforts and abilities of
Brad Mattson, our chairman and chief executive officer, as well as other key
managerial and technical employees who would be difficult to replace. The loss
of Mr. Mattson or other key employees could limit or delay our ability to
develop new products and adapt existing products to our customers' evolving
requirements and result in lost sales and diversion of management resources.
None of our executive officers are bound by a written employment agreement and
our relationships with our officers are at will.

                                       27
<PAGE>   28

BECAUSE OF COMPETITION FOR ADDITIONAL QUALIFIED PERSONNEL, WE MAY NOT BE ABLE TO
RECRUIT OR RETAIN NECESSARY PERSONNEL, WHICH COULD IMPEDE DEVELOPMENT OR SALES
OF OUR PRODUCTS

        Our growth depends 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. Competition for such personnel is intense, particularly in
the San Francisco Bay Area where we are based. If we are unable to retain our
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, EXPERIENCE REDUCED MARKET SHARE OR INCUR COSTLY LITIGATION TO PROTECT OUR
PROPRIETARY TECHNOLOGY

        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. In addition, any patents issued
to us could be challenged, invalidated or circumvented and any rights granted
under the patent may not provide adequate protection to us. Furthermore, we may
not have sufficient resources to prosecute our rights.

        Our competitors may independently develop similar technology, duplicate
our products or design around patents that may be issued to us. In addition, the
laws of some foreign countries may not protect our proprietary rights to as
great an extent as do the laws of the United States and it may be more difficult
to monitor the use of our products. 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 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' proprietary rights. 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 systems. Any of these situations could have a material adverse effect on our
business and operating results.

OUR FAILURE TO COMPLY WITH ENVIRONMENTAL REGULATIONS COULD RESULT IN SUBSTANTIAL
LIABILITY TO US

        We are subject to a variety of federal, state and local 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, we
could be subject to substantial liability for clean up efforts, personal injury
and fines or suspension or cessation of our operations. 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.

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. We believe that a number of
factors could cause the price of our common stock to fluctuate, perhaps
substantially, including:

        -      general conditions in the semiconductor industry or in the
               worldwide economy;

        -      announcements of developments related to our business;

        -      fluctuations in our operating results and order levels;

                                       28
<PAGE>   29

        -      announcements of technological innovations by us or by our
               competitors;

        -      new products or product enhancements by us or by our competitors;

        -      developments in patents or other intellectual property rights; or

        -      developments in our relationships with our customers,
               distributors and suppliers.

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

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

        -      potential disruption of our ongoing business;

        -      unanticipated costs associated with the acquisition;

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

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

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

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

YEAR 2000 COMPLICATIONS MAY DISRUPT OUR OPERATIONS AND HARM OUR BUSINESS

        The date fields coded in many software products and computer systems
need to be able to distinguish 21st century dates from 20th century dates,
including leap year calculations. The failure to be able to accurately
distinguish these dates is commonly known as the year 2000 problem. While we
have yet to experience year 2000 problems, the computer software programs and
operating systems used in our internal operations, including our financial,
product development, order management and manufacturing systems, could
experience errors or interruptions due to the year 2000 problem. For example, a
significant failure of our computer integrated manufacturing systems, which
monitor and control factory equipment, could disrupt manufacturing operations
and cause a delay in completion and shipping of products. In addition, it is
possible that our suppliers' and service providers' failure to adequately
address the year 2000 problem could have an adverse effect on their operations,
which, in turn, could have an adverse impact on us.

ITEM 7A: QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

        As of December 31, 1999, we had no short term investments and thus no
exposure to changes in market values for investments.

        We have international facilities and are, therefore, subject to foreign
currency exposure. The local currency is the functional currency for all foreign
sales operations except those in Japan, where the U.S. dollar is the functional
currency. To date, our exposure related to exchange rate volatility has not been
significant. Due to the short term nature of our investments, we do not believe
that we have a material risk exposure with respect to financial instruments.


                                       29
<PAGE>   30

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

        Index to Consolidated Financial Statements


<TABLE>
<CAPTION>
      Consolidated Financial Statements:                              Page
                                                                      ----
<S>                                                                   <C>
        Consolidated Balance Sheets as of
          December 31, 1999 and 1998                                  31

        Consolidated Statements of Operations
           for the years ended December 31,
           1999, 1998 and 1997                                        32

        Consolidated Statements of
         Stockholders' Equity for the three
         years ended December 31, 1999                                33

        Consolidated Statements of Cash Flows
         for the years ended December 31,
         1999, 1998 and 1997                                          34

        Notes to Consolidated Financial Statements                    35

        Report of Independent Public
         Accountants                                                  46

        Report of Independent Accountants                             47

        Financial Statement Schedules: All schedules are omitted
         because they are either not applicable or the required
         information is shown in the consolidated financial
         statements or notes thereto.
</TABLE>



                                       30
<PAGE>   31

                    MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                               AS OF DECEMBER 31,
                                                                            -----------------------
                                                                              1999           1998
                                                                            --------       --------
<S>                                                                         <C>            <C>
                                         ASSETS
Current assets:
  Cash and cash equivalents ..........................................      $ 16,965       $ 11,863
  Short-term investments .............................................            --          8,128
  Accounts receivable, net of allowances for doubtful accounts of
    $141 in 1999 and 1998 ............................................        21,500          9,614
  Inventories ........................................................        25,374         10,924
  Refundable income taxes ............................................            --          3,300
  Note receivable from stockholder ...................................            --          3,129
  Prepaid expenses and other current assets ..........................         2,299          2,316
                                                                            --------       --------
       Total current assets ..........................................        66,138         49,274
Property and equipment, net ..........................................        11,260         12,090
Goodwill, intangibles and other assets ...............................         3,750          6,756
                                                                            --------       --------
                                                                            $ 81,148       $ 68,120
                                                                            ========       ========
                          LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Line of credit .....................................................      $  3,000           $ --
  Accounts payable ...................................................         8,494          3,399
  Accrued liabilities ................................................        17,635         14,841
                                                                            --------       --------
       Total current liabilities .....................................        29,129         18,240
                                                                            --------       --------
Commitments and contingencies (Note 13)
Stockholders' equity:
  Common Stock, par value $0.001, 60,000 shares authorized; 16,591
issued, 16,216 outstanding ...........................................            16             16
    in 1999 and 15,772 shares issued and 15,397 outstanding in 1998
  Additional paid in capital .........................................        66,280         63,239
  Accumulated other comprehensive loss ...............................          (191)          (138)
  Treasury stock, 375 shares in 1999 and 1998 at cost ................        (2,987)        (2,987)
  Retained earnings (deficit) ........................................       (11,099)       (10,250)
                                                                            --------       --------
       Total stockholders' equity ....................................        52,019         49,880
                                                                            --------       --------
                                                                            $ 81,148       $ 68,120
                                                                            ========       ========
</TABLE>



          See accompanying notes to consolidated financial statements.



                                       31
<PAGE>   32

                    MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                   YEAR ENDED DECEMBER 31,
                                                           -----------------------------------------
                                                             1999            1998            1997
                                                           ---------       ---------       ---------
<S>                                                        <C>             <C>             <C>
Net sales ...........................................      $ 103,458       $  59,186       $  76,730
Cost of sales .......................................         53,472          37,595          37,130
                                                           ---------       ---------       ---------
  Gross profit ......................................         49,986          21,591          39,600
                                                           ---------       ---------       ---------
Operating expenses:
  Research, development and engineering .............         19,547          16,670          14,709
  Selling, general and administrative ...............         31,784          24,542          24,495
  Acquired in-process research and
   development ......................................             --           4,220              --
                                                           ---------       ---------       ---------
     Total operating expenses .......................         51,331          45,432          39,204
                                                           ---------       ---------       ---------
Income (loss) from operations .......................         (1,345)        (23,841)            396
Interest and other income, net ......................            743           1,811           1,486
                                                           ---------       ---------       ---------
Income (loss) before provision for
   income taxes .....................................           (602)        (22,030)          1,882
Provision for income taxes ..........................            247             337             451
                                                           ---------       ---------       ---------
Net income (loss) ...................................      $    (849)      $ (22,367)      $   1,431
                                                           =========       =========       =========
Net income (loss) per share:
  Basic .............................................      $   (0.05)      $   (1.52)      $    0.10
                                                           =========       =========       =========
  Diluted ...........................................      $   (0.05)      $   (1.52)      $    0.09
                                                           =========       =========       =========
Shares used in computing net income (loss) per share:
  Basic .............................................         15,730          14,720          14,117
                                                           =========       =========       =========
  Diluted ...........................................         15,730          14,720          15,311
                                                           =========       =========       =========
</TABLE>



          See accompanying notes to consolidated financial statements.



                                       32
<PAGE>   33

                    MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                                       ACCUMULATED
                                                       COMMON                                             OTHER
                                                       STOCK               ADDITIONAL                  COMPREHENSIVE
                                              -----------------------       PAID IN                        INCOME
                                               SHARES         AMOUNT        CAPITAL        OTHER          (LOSS)
                                              --------       --------      --------       --------       --------
<S>                                           <C>            <C>           <C>            <C>          <C>
Balance at December 31, 1996 ...........        14,197       $     14      $ 57,566       $    (13)      $    (77)
Repurchase of Common Stock, net ........          (335)            --        (2,197)            --             --
Exercise of stock options ..............           183             --           261             --             --
Shares issued under employee stock
purchase plan ..........................           244             --         1,598             --             --
Income tax benefits realized from
  activity in employee stock plans .....            --             --           190             --             --
Amortization of deferred compensation ..            --             --            --             13             --
Net unrealized gain on investments .....            --             --            --             --             23
Cumulative translation adjustments .....            --             --            --             --           (236)
Net income .............................            --             --            --             --             --
Total comprehensive income .............            --             --            --             --             --
                                              --------       --------      --------       --------       --------
Balance at December 31, 1997 ...........        14,289             14        57,418             --           (290)
Repurchase of Common Stock, net ........            --             --            --             --
Exercise of stock options ..............           380             --           163             --             --
Shares issued under employee stock
   purchase plan .......................           308              1         1,620             --             --
Shares issued for acquisition of Concept
Systems Design, Inc. ...................           795              1         4,038             --             --
Cumulative translation adjustments .....            --             --            --             --            152
Net loss ...............................            --             --            --             --             --
Total comprehensive loss ...............            --             --            --             --             --
                                              --------       --------      --------       --------       --------
Balance at December 31, 1998 ...........        15,772             16        63,239             --           (138)
Exercise of stock options, net .........           456             --         1,431             --             --
Shares issued under employee stock
   purchase plan .......................           363             --         1,610             --             --
Cumulative translation adjustments .....            --             --            --             --            (53)
Net loss ...............................            --             --            --             --             --
Total comprehensive loss ...............            --             --            --             --             --
                                              --------       --------      --------       --------       --------
Balance at December 31, 1999 ...........        16,591       $     16      $ 66,280           $ --       $   (191)
                                              ========       ========      ========       ========       ========
</TABLE>


<TABLE>
<CAPTION>


                                                    TREASURY STOCK          RETAINED
                                              -----------------------       EARNINGS
                                               SHARES          AMOUNT      (DEFICIT)        TOTAL
                                              --------       --------       --------       --------
<S>                                           <C>            <C>            <C>            <C>
Balance at December 31, 1996 ...........            --           $ --       $ 11,625       $ 69,115
Repurchase of Common Stock, net ........          (100)        (1,075)          (939)        (4,211)
Exercise of stock options ..............            --             --             --            261
Shares issued under employee stock
purchase plan ..........................            --             --             --          1,598
Income tax benefits realized from
  activity in employee stock plans .....            --             --             --            190
Amortization of deferred compensation ..            --             --             --             13
Net unrealized gain on investments .....            --             --             --             --
Cumulative translation adjustments .....            --             --             --             --
Net income .............................            --             --          1,431             --
Total comprehensive income .............            --             --             --          1,218
                                              --------       --------       --------       --------
Balance at December 31, 1997 ...........          (100)        (1,075)        12,117         68,184
Repurchase of Common Stock, net ........          (275)        (1,912)                       (1,912)
Exercise of stock options ..............            --             --             --            163
Shares issued under employee stock
   purchase plan .......................            --             --             --          1,621
Shares issued for acquisition of Concept
Systems Design, Inc. ...................            --             --             --          4,039
Cumulative translation adjustments .....            --             --             --             --
Net loss ...............................            --             --        (22,367)            --
Total comprehensive loss ...............            --             --             --        (22,215)
                                              --------       --------       --------       --------
Balance at December 31, 1998 ...........          (375)        (2,987)       (10,250)        49,880
Exercise of stock options, net .........            --             --             --          1,431
Shares issued under employee stock
   purchase plan .......................            --             --             --          1,610
Cumulative translation adjustments .....            --             --             --             --
Net loss ...............................            --             --           (849)            --
Total comprehensive loss ...............            --             --             --           (902)
                                              --------       --------       --------       --------
Balance at December 31, 1999 ...........          (375)      $ (2,987)      $(11,099)      $ 52,019
                                              ========       ========       ========       ========
</TABLE>



          See accompanying notes to consolidated financial statements.



                                       33
<PAGE>   34

                    MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                         YEAR ENDED DECEMBER 31,
                                                   --------------------------------------
                                                     1999           1998           1997
                                                   --------       --------       --------
<S>                                                <C>            <C>            <C>
Cash flows from operating activities:
  Net income (loss) .........................      $   (849)      $(22,367)      $  1,431
  Adjustments  to reconcile  net income
     (loss) to net cash provided by (used in)
     operating activities:
     Depreciation and amortization ..........         4,801          4,441          2,856
     Acquired  in-process  research and
     development ............................            --          4,220             --
     Deferred taxes .........................            --          4,222            (25)
     Deferred compensation related to
     stock options ..........................            --             --             13
     Changes in assets and liabilities:
       Accounts receivable ..................       (11,886)         5,509          1,170
       Inventories ..........................       (14,822)        10,714         (6,114)
       Refundable income taxes ..............         3,300         (2,748)            --
       Prepaid expenses and other
       current assets .......................          (603)        (1,183)          (118)
       Other assets .........................            39             72          2,962
       Accounts payable .....................         5,095         (4,468)         2,109
       Accrued liabilities ..................         5,415         (3,771)        (1,224)
                                                   --------       --------       --------
Net cash provided by (used in)
operating activities ........................        (9,510)        (5,359)         3,060
                                                   --------       --------       --------

Cash flows from investing activities:
  Acquisition of property and equipment .....        (3,250)        (1,726)        (4,671)
  Note receivable from stockholder ..........         3,749         (3,129)            --
  Purchases of short term investments .......            --        (13,606)       (16,468)
  Sales and  maturities  of short  term
   investments ..............................         8,128         14,090         24,513
  Repayment of debt acquired in
   acquisition ..............................            --         (4,000)            --
                                                   --------       --------       --------
Net cash provided by (used in)
investing activities ........................         8,627         (8,371)         3,374
                                                   --------       --------       --------

Cash flows from financing activities:
  Borrowings against line of credit .........         3,000             --             --
  Proceeds  from the issuance of Common .....         3,041          1,784          2,049
Stock, net
  Repurchase of Common Stock ................            --         (1,912)        (4,211)
                                                   --------       --------       --------
Net cash provided by (used in)
  financing activities ......................         6,041           (128)        (2,162)
                                                   --------       --------       --------
Effect of exchange rate changes .............           (56)           138           (236)
                                                   --------       --------       --------
Net increase (decrease) in cash and
cash equivalents ............................         5,102        (13,720)         4,036
Cash and cash equivalents, beginning
  of year ...................................        11,863         25,583         21,547
                                                   --------       --------       --------
Cash and cash equivalents, end of year ......      $ 16,965       $ 11,863       $ 25,583
                                                   ========       ========       ========
Supplemental disclosures:
  Cash paid for interest ....................      $     58       $     --       $     --
  Cash paid for income taxes ................      $    224       $    280       $    629
  Common stock  issued for  acquisition
   of Concept ...............................      $     --       $  4,039       $     --
  Non-cash adjustment to goodwill and
   intangibles ..............................      $  2,200       $     --       $     --
</TABLE>



          See accompanying notes to consolidated financial statements.



                                       34
<PAGE>   35

                    MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

        Mattson Technology, Inc. (the "Company") 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 advanced fabrication
equipment to the semiconductor manufacturing industry worldwide.

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. The preparation of financial statements in
conformity with generally accepted accounting principles 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 fiscal year ends on December 31. The Company's fiscal
quarters end on the last Sunday in the calendar quarter.

CASH EQUIVALENTS AND SHORT TERM INVESTMENTS

        For purposes of the statement of cash flows, the Company considers all
highly liquid instruments with an original maturity of three months or less to
be cash equivalents. Cash equivalents consist primarily of money market funds.
Short term investments consist of commercial paper and U.S. Treasury securities
with maturities of more than three months. The Company classifies its
investments in commercial paper and U.S. Treasury securities as "available for
sale" and the investments are reported at fair market value. As of December 31,
1998, the fair value of the investments in commercial paper and U.S. Treasury
securities approximated amortized cost and, as such, unrealized holding gains
and losses were insignificant. The fair value of the Company's investments was
determined based on quoted market prices at the reporting date for those
instruments.

INVENTORIES

        Inventories are stated at the lower of standard cost, which approximates
actual cost, using the first-in, first-out method, or market, and include
material, labor and manufacturing overhead costs.

WARRANTY COSTS

        Upon shipment of product, the Company accrues the estimated cost of
warranty. The Company offers a 36 month warranty on all of its systems sold
after January 1996, other than the EpiPro 5000 system and any systems sold in
Japan, and a 12 month warranty in Japan and on its EpiPro products.

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 five years. Leasehold improvements are
amortized using the straight-line method over the term of the related lease or
the estimated useful lives of the improvements, whichever is less.

GOODWILL AND INTANGIBLE ASSETS

        Purchased technology, workforce and goodwill are presented at cost, net
of accumulated amortization, and are being amortized using the straight-line
method over their estimated useful lives of three to seven years.



                                       35
<PAGE>   36

STOCK-BASED COMPENSATION

        In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." As allowed by the provisions of SFAS No. 123, the Company has
continued to apply APB Opinion No. 25 in accounting for its stock option plans
and, accordingly, does not recognize compensation cost because the exercise
price equals the market price of the underlying stock at the date of grant. The
Company has adopted the disclosure only provisions of SFAS No. 123 and Note 6 to
the Consolidated Financial Statements contains a summary of the pro forma
effects to reported net income (loss) and earnings (loss) per share for 1999,
1998 and 1997 for compensation cost based on the fair value of the options
granted at the grant date as prescribed by SFAS No. 123.

REVENUE RECOGNITION

        System sales are generally recognized upon shipment. However, in certain
circumstances, the Company allows customers to evaluate systems, and since
customers can return such systems to the Company at any time with limited or no
penalty, the Company does not recognize the associated revenue until an
evaluation system is accepted by the customer. Sales to our distributor in Japan
are recognized upon shipment with reserves provided for limited rights of return
(see Note 10). Service and maintenance contract revenue, which to date has been
insignificant, is recognized on a straight-line basis over the service period of
the related contract. A provision for the estimated future cost of system
installation and warranty is recorded at the time revenue is recognized.

COMPREHENSIVE INCOME

        In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for disclosure and financial
statement display for reporting total comprehensive income and its individual
components. Comprehensive income, as defined, includes all changes in equity
during a period from non-owner sources. The Company's comprehensive income
includes net income, foreign currency translation adjustments and unrealized
gains and losses on investments and is displayed in the statement of
stockholders' equity.

FOREIGN CURRENCY ACCOUNTING

        The local currency is the functional currency for all foreign operations
except those in Japan, where the U.S. dollar is the functional currency. Gains
or losses from translation of foreign operations where the local currencies are
the functional currency are included as a component of stockholders' equity.
Foreign currency transaction gains and losses are recognized in the statements
of operations and have not been material.

NET INCOME (LOSS) PER SHARE

        Basic earnings per share (EPS) is computed by dividing income available
to common stockholders (numerator) by the weighted average number of common
shares outstanding (denominator) for the period. Diluted EPS gives effect to all
dilutive potential common shares outstanding during the period. The computation
of diluted EPS uses the average market prices during the period.

SEGMENT REPORTING

        In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments
of an Enterprise and Related Information." SFAS No. 131 changes the way
companies report selected segment information in annual financial statements and
also requires companies to report selected segment information in interim
financial reports. The Company operates in one reportable segment. Note 11 of
the Consolidated Financial Statements contains a summary table of industry
segment, geographic and customer information.

SFAS NO. 133 "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES"

        In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 establishes new standards of accounting and reporting
for derivative instruments and hedging activities. SFAS No. 133 requires that
all derivatives be recognized at fair value in the statement of financial
position, and that the corresponding gains or losses be reported either in the
statement of operations or as a component of comprehensive income, depending on
the type of hedging relationship that exists. SFAS No. 133 is effective for
fiscal years beginning after June 15, 2000 and cannot be applied retroactively.
The effect of adopting SFAS No. 133 is not expected to be material to the
Company's financial statements.



                                       36
<PAGE>   37

2. ACQUISITION OF CONCEPT SYSTEMS DESIGN

        On July 24, 1998, the Company acquired Concept Systems Design. The
transaction was achieved through the merger of a wholly owned subsidiary of the
Company with and into Concept. In connection with the merger, the Company issued
795,138 shares of Common Stock to the former shareholders of Concept.

        In addition to the issuance of the 795,138 shares mentioned above, the
agreement for the acquisition of Concept also includes the contingent issuance
and distribution of 100,000 shares of Mattson Common Stock to the Concept
shareholders if Concept achieves net revenues of at least $16,667,000 during the
first 24 full calendar months following the acquisition date. Additional shares
issued, if any, will be valued at the fair value of the shares at the date of
issue and will result in additional goodwill.

        The merger has been accounted for as a purchase and the results of
operations of Concept were included in the consolidated statement of operations
of the Company from the date of acquisition. The purchase price of the
acquisition of $4,689,000, which included $650,000 of estimated acquisition
related costs, was used to acquire the net assets of Concept. The purchase price
was allocated to assets acquired and liabilities assumed based on the fair value
of Concept's current assets and liabilities, which management believed
approximated their book value, the estimated fair value of property and
equipment, based on management's estimates of fair value, and an independent
appraisal for all other identifiable assets. The excess of the purchase price
over the net tangible and intangible assets acquired and liabilities assumed was
allocated to goodwill. The allocation of the purchase price was as follows (in
thousands):

<TABLE>
<S>                                           <C>
Property and equipment .................      $  3,055
Current and other assets ...............         4,041
Liabilities assumed ....................       (13,570)
Acquired developed technology and
  workforce ............................         5,300
Goodwill ...............................         1,643
Acquired in-process research and
development ............................         4,220
                                              --------
                                              $  4,689
                                              ========
</TABLE>

        In the first quarter of 1999, a preacquisition contingency was resolved
which reduced the liabilities assumed from Concept by approximately $2.2
million. Under the provisions of Statement of Financial Accounting Standards No.
38, this has been recorded by the Company in the first quarter of 1999 on a
prospective basis as an elimination of previously recorded goodwill and a
pro-rata reduction of the balance to the acquired developed technology,
workforce and property and equipment. The acquired developed technology and
workforce are recorded on the balance sheet as long term assets and will be
amortized on a straight line basis over periods ranging from 3 to 7 years. The
acquired in-process research and development was expensed at the time of
acquisition as a one time charge.

        The original amount allocated to in-process research and development and
other intangible assets in the third quarter of 1998 of $5.7 million and $5.4
million, respectively, relating to the acquisition of Concept, was made in a
manner consistent with widely recognized appraisal practices that were being
utilized at the time of acquisition. Subsequent to the acquisition, in a letter
dated September 15, 1998 to the American Institute of Certified Public
Accountants, the Chief Accountant of the Securities and Exchange Commission
expressed views of the SEC staff that took issue with certain appraisal
practices employed in the determination of the fair value of the in-process
research and development that was the basis for the Company's measurement of its
in-process research and development charge. Accordingly, the Company resolved to
adjust the amount originally allocated to acquired in-process research and
development and other intangible assets in a manner to reflect the SEC staff's
views and restated its third quarter 1998 consolidated financial statements and
filed an amended Form 10-Q. The revised amount of in-process research and
development and other intangible assets that resulted from this change was $4.2
million and $6.9 million, respectively.

        The value assigned to in-process research and development was determined
by identifying research projects in areas for which technological feasibility
had not been established. These included the Concept EpiPro 5000 system and a
single wafer Episystem. The value was determined by estimating the expected cash
flows from the projects (taking into consideration an estimate of future
obsolescence of the technology) once commercially viable, applying a percentage
of completion and then discounting the net cash flows back to their present
value. The Company believes the efforts to complete the in-process research and
development projects will consist of internally staffed engineers and will be
completed in 2001. The estimated costs to complete the research and development
is approximately $1.7 million. There is substantial risk associated with the
completion of each project and there is no assurance that any of the projects
will meet with technological or commercial success.

        The percentage of completion for each project was determined using
management estimates of time and dollars spent as of the acquisition date as
compared to time and dollars that were expected to be required to complete the
projects. The degree of difficulty of



                                       37
<PAGE>   38

the portion of each project completed as of July 24, 1998 was also compared to
the remaining research and development to be completed to bring each project to
technical feasibility. At July 24, 1998, the percentage of completion for the
Concept EpiPro 5000 was estimated at 80% and for the single wafer Episystem at
50%.

        If the projects discussed above are not successfully developed, the
sales and profitability of the combined company may be adversely affected in
future periods. Additionally, the value of other intangible assets acquired may
become impaired. Company management believes that the restated in-process
research and development charge of $4.2 million is valued consistently with the
SEC staff's current views regarding valuation methodologies. There can be no
assurance, however, that the SEC staff will not take issue with any assumptions
used in the Company's valuation model and require the Company to further revise
the amount allocated to in-process research and development.

        The following pro forma summary is provided for illustrative purposes
only and is not necessarily indicative of the consolidated results of operations
for future periods or that actually would have been realized had the Company and
Concept been a consolidated entity during the periods presented. The summary
combines the results of operations as if Concept had been acquired as of the
beginning of the periods presented.

        The summary includes the impact of certain adjustments such as goodwill
amortization and changes in depreciation. Additionally, the non-recurring
in-process research and development charge of $4.2 million has been excluded
from the periods presented.

        The following table represents unaudited pro forma information assuming
that the acquisition took place at the beginning of the periods presented:

<TABLE>
<CAPTION>
                                           YEAR ENDED DECEMBER 31,
                                         --------------------------
                                           1998              1997
                                         --------          --------
                                                 (UNAUDITED)
                                         (IN THOUSANDS, EXCEPT PER
                                                 SHARE DATA)
<S>                                      <C>               <C>
Net sales ......................         $ 62,503          $ 83,040
Net loss .......................         $(32,632)         $ (8,694)
Basic and diluted loss per share         $  (2.25)         $  (0.58)
</TABLE>

3. LINE OF CREDIT

        In July 1999, the Company entered into a revolving line of credit
agreement with a bank under which it can borrow up to $15 million. The line of
credit bears interest at the Company's option of a per annum rate of 200
percentage points above LIBOR or a per annum rate equal to the lender's Prime
Rate. At December 31, 1999, the interest rate was 8.5%. The line of credit
expires on July 8, 2000. At December 31, 1999 the Company had $3.0 million
outstanding under the line of credit agreement. The line of credit is secured by
the Company's accounts receivable and other tangible assets and contains certain
financial covenants determined on a quarterly basis.

4. NOTES RECEIVABLE FROM STOCKHOLDER

        During the third quarter of 1998, the Company extended a one year loan
to its Chief Executive Officer in the amount of $3.1 million. The loan was
collateralized by 2.2 million shares of the Company's Common Stock owned by the
Chief Executive Officer and was a full recourse note bearing interest at 8%.
Interest was payable at the end of the one year loan. During 1999, the Company
extended the loan for an additional six months and increased the note to $3.7
million. The $3.7 million includes accrued interest of $0.3 million and an
additional $0.3 million loaned to the Chief Executive Officer. During the fourth
quarter of 1999, the Chief Executive Officer fully repaid the note and all
accrued interest.



                                       38
<PAGE>   39

5. BALANCE SHEET DETAIL

<TABLE>
<CAPTION>
                                                               AS OF DECEMBER 31,
                                                          --------------------------
                                                            1999              1998
                                                          --------          --------
                                                                (IN THOUSANDS)
<S>                                                       <C>               <C>
INVENTORIES:
  Purchased parts and raw materials .............         $ 13,656          $  7,128
  Work-in-process ...............................            9,433             2,586
  Finished goods ................................               --             1,147
  Evaluation systems ............................            2,285                63
                                                          --------          --------
                                                          $ 25,374          $ 10,924
                                                          ========          ========
PROPERTY AND EQUIPMENT, NET:
  Machinery and equipment .......................         $ 13,544          $ 12,487
  Furniture and fixtures ........................            5,509             4,583
  Leasehold improvements ........................            3,705             2,880
  Construction-in-progress ......................            1,738               740
                                                          --------          --------
                                                            24,496            20,690
  Less: accumulated depreciation and amortization          (13,236)           (8,600)
                                                          --------          --------
                                                          $ 11,260          $ 12,090
                                                          ========          ========

GOODWILL, INTANGIBLES AND OTHER ASSETS:
  Developed technology ..........................         $  3,897          $  4,340
  Purchased workforce ...........................              875               960
  Goodwill ......................................               --             1,643
  Other .........................................              334               375
                                                          --------          --------
                                                             5,106             7,318
  Less: accumulated amortization ................           (1,356)             (562)
                                                          --------          --------
                                                          $  3,750          $  6,756
                                                          ========          ========
ACCRUED LIABILITIES:
  Warranty and installation reserve .............         $  7,371          $  5,820
  Accrued compensation and benefits .............            5,041             1,214
  Income taxes ..................................            1,392             1,131
  Commissions ...................................            1,045               539
  Customer deposits .............................              253             2,690
  Deferred income ...............................            1,308             1,437
  Other .........................................            1,225             2,010
                                                          --------          --------
                                                          $ 17,635          $ 14,841
                                                          ========          ========
</TABLE>

6. CAPITAL STOCK

COMMON STOCK

        In 1996, the Board of Directors authorized the Company to repurchase up
to 500,000 shares of the Company's Common Stock in the open market. As of
December 31, 1997, all 500,000 shares had been repurchased by the Company for
funding the Company's Employee Stock Purchase Plan. Of the shares purchased,
400,000 shares were purchased prior to the Company's reincorporation in Delaware
in September 1997, and were retired. The 100,000 shares repurchased after the
reincorporation in Delaware are held as treasury stock. In 1998, the Board of
Directors authorized the Company to repurchase up to 1,000,000 shares of the
Company's Common Stock in the open market. As of December 31, 1999, the Company
had repurchased 274,800 of these shares. The total cost of share repurchases was
$2,987,000 and these shares are held as treasury stock.

STOCK OPTION PLAN

        In September 1989, the Company adopted an incentive and non-statutory
stock option plan under which a total of 4,300,000 shares of Common Stock have
been reserved for future issuance, including increases of 1,000,000 shares in
1996, 300,000 shares in 1997, 250,000 shares in 1998 and 1,125,000 shares in
1999. Options granted under this Plan are for periods not to exceed ten years.
Incentive stock option and non-statutory stock option grants under the 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.

        A summary of the status of the Company's stock option plans at December
31, 1999, 1998 and 1997 and changes during the years then ended is presented in
the following tables and narrative. Share amounts are shown in thousands.



                                       39
<PAGE>   40

<TABLE>
<CAPTION>
                                                                            YEAR ENDED DECEMBER 31,
                                                      ----------------------------------------------------------------------
                                                             1999                     1998                       1997
                                                      ------------------        ------------------        ------------------
                                                                 WEIGHTED-                 WEIGHTED-                 WEIGHTED-
                                                                  AVERAGE                  AVERAGE                    AVERAGE
                                                                 EXERCISE                  EXERCISE                   EXERCISE
ACTIVITY                                             SHARES        PRICE       SHARES        PRICE       SHARES        PRICE
- --------                                              -----        -----        -----        -----        -----        -----
<S>                                                  <C>         <C>           <C>         <C>           <C>         <C>
Outstanding at beginning of year .............        3,084        $6.19        3,067        $6.82        2,544        $5.62
Granted ......................................          881         9.97        1,337         5.71          926         9.66
Exercised ....................................         (489)        3.59         (380)        0.57         (182)        1.43
Forfeited ....................................         (333)        6.98         (940)        9.85         (221)        9.48
                                                      -----                     -----                     -----        -----
Outstanding at end of year ...................        3,143         7.57        3,084         6.19        3,067         6.82
                                                      =====                     =====                     =====
Exercisable, end of year .....................        1,353         6.85        1,138         5.35        1,361         3.97
                                                      =====                     =====                     =====
Weighted-average fair value per option granted                     $6.13                     $3.53                     $4.67
                                                                   =====                     =====                     =====
</TABLE>


        In November 1998, the Board of Directors approved a proposal under which
all employees, other than executive officers, could elect to cancel certain
options in exchange for grants of new options with exercise prices which were
equal to the fair value of the Company's Common Stock on the date of the Board's
approval and for which a new four year vesting period commenced as of the new
date of grant. Employees canceled options for the purchase of a total of 681,315
shares at exercise prices ranging from $3.41 to $24.50, in exchange for newly
issued options with an exercise price of $6.00 per share, which was the fair
market value on the date of the Board's approval.

        The following table summarizes information about stock options
outstanding at December 31, 1999 (amounts in thousands except exercise price and
contractual life):

<TABLE>
<CAPTION>
                                     OPTIONS OUTSTANDING                   OPTIONS EXERCISABLE
                          ---------------------------------------      --------------------------
                                        WEIGHTED-
                                         AVERAGE     WEIGHTED-                       WEIGHTED
   RANGE OF                             REMAINING     AVERAGE                         AVERAGE
EXERCISE PRICES           NUMBER          YEARS    EXERCISE PRICE      NUMBER      EXERCISE PRICE
- ---------------           ------          -----    --------------      ------      --------------
<S>                       <C>           <C>        <C>                 <C>         <C>
$0.20 -- $5.09             555             6.5         $ 3.45            407          $ 2.94

$5.13 -- $5.88             171             8.7         $ 5.54             51          $ 5.50

$6.00 -- $6.00             664             8.1         $ 6.00            267          $ 6.00

$6.06 -- $7.31             530             9.1         $ 7.04             30          $ 7.02

$7.50 -- $9.38             564             6.4         $ 8.90            338          $ 9.08

$9.75 -- $23.00            659             6.8         $12.48            260          $11.19
                         -----          ------         ------          -----          ------
                         3,143             7.5         $ 7.57          1,353          $ 6.85
                         =====          ======         ======          =====          ======
</TABLE>

        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 for the multiple option approach with the
following weighted average assumptions:

<TABLE>
<CAPTION>
                                         1999           1998            1997
                                         ----           ----            ----
<S>                                    <C>            <C>             <C>
Expected dividend yield .......            --             --             --
Expected stock price volatility            80%            80%            60%
Risk-free interest rate .......           5.8%           4.5%           6.0%
Expected life of options ......        2 years        2 years         1 year
</TABLE>

EMPLOYEE STOCK PURCHASE PLAN

        In August 1994, the Company adopted an employee stock purchase plan
under which 1,925,000 shares of Common Stock have been reserved for future
issuance, including an increase of 65,000 in 1996, 400,000 shares in 1997,
450,000 shares in 1998 and 475,000 shares in 1999. The Purchase Plan is
administered generally over offering periods of 24 months, with each offering
period divided into four consecutive six-month purchase periods beginning May 1
and November 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 employee stock 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 of 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.

        The weighted average fair value on the grant date of rights granted
under the employee stock purchase plan was approximately $3.15 in 1999, $3.42 in
1998 and $2.96 in 1997.



                                       40
<PAGE>   41

        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:

<TABLE>
<CAPTION>
                                         1999           1998          1997
                                         ----           ----          ----
<S>                                    <C>             <C>          <C>
Expected dividend yield .......            --             --             --
Expected stock price volatility            80%            80%            60%
Risk-free interest rate .......           5.8%           4.5%           6.0%
Expected life of options ......        2 years         1 year       6 months
</TABLE>

PRO FORMA EFFECT OF STOCK BASED COMPENSATION PLANS

        In accordance with the provisions of SFAS No. 123, the Company applies
APB Opinion No. 25 in accounting for its incentive stock option and employee
stock purchase plans, and accordingly, does not recognize compensation cost in
the statement of operations because the exercise price of the stock options
equals the market price of the underlying stock on the date of grant. If the
Company had elected to recognize compensation cost based on the fair value of
the options granted at grant date as prescribed by SFAS No. 123, net income
(loss) and earnings (loss) per share would have been adjusted to the pro forma
amounts indicated in the table below:

<TABLE>
<CAPTION>
                                                            YEAR ENDED DECEMBER 31,
                                            ---------------------------------------------------
                                               1999                1998                 1997
                                            ----------          ----------           ----------
                                                  (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                         <C>                 <C>                  <C>
Net income (loss):
  As reported ....................          $     (849)         $  (22,367)          $    1,431
  Pro forma ......................          $   (5,430)         $  (25,471)          $   (2,154)
Diluted earnings (loss) per share:
  As reported ....................          $    (0.05)         $    (1.52)          $     0.09
  Pro forma ......................          $    (0.35)         $    (1.73)          $    (0.15)
</TABLE>

        Since SFAS No. 123 method of accounting has not been applied to options
granted prior to July 1995, the resulting pro forma compensation cost may not be
representative of that to be expected in future years.

7. INCOME TAX PROVISION

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

<TABLE>
<CAPTION>
                                                                        YEAR ENDED DECEMBER 31,
                                                           ----------------------------------------------
                                                             1999               1998               1997
                                                           --------           --------           --------
                                                                           (IN THOUSANDS)
<S>                                                        <C>                <C>                <C>
Domestic income (loss) ..........................          $ (1,065)          $(22,467)          $  1,347
Foreign income ..................................               463                437                535
                                                           --------           --------           --------
  Income (loss) before provision for income taxes          $   (602)          $(22,030)          $  1,882
                                                           ========           ========           ========
</TABLE>

        The provision for income taxes consists of the following:

<TABLE>
<CAPTION>
                                               YEAR ENDED DECEMBER 31,
                                      ------------------------------------------
                                        1999            1998              1997
                                      -------          -------           -------
                                                   (IN THOUSANDS)
<S>                                   <C>              <C>               <C>
Current:
  Federal ..................          $    --          $(3,589)          $   237
  State ....................               --             (633)                2
  Foreign ..................              247              337               237
                                      -------          -------           -------
Total Current ..............              247           (3,885)              476
                                      -------          -------           -------
Deferred:
  Federal ..................               --            3,589               180
  State ....................               --              633              (205)
                                      -------          -------           -------
Total Deferred .............               --            4,222               (25)
                                      -------          -------           -------
  Provision for income taxes          $   247          $   337           $   451
                                      =======          =======           =======
</TABLE>



                                       41
<PAGE>   42

        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:

<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                       -------------------------------------------
                                                        1999              1998              1997
                                                       -------           -------           -------
                                                                     (IN THOUSANDS)
<S>                                                    <C>               <C>               <C>
Provision (benefit) at statutory rate .......          $  (211)          $(7,710)          $   659
Research and development tax credits ........             (499)               --              (307)
State taxes, net of federal benefit .........                2                --                51
Foreign earnings taxed at higher rates ......               85               184                81
Benefit of foreign sales corporation ........               --                --               (51)
Deferred tax asset valuation allowance ......              816             7,863                --
Other .......................................               54                --                18
                                                       -------           -------           -------
Total provision for income taxes ............          $   247           $   337           $   451
                                                       =======           =======           =======
</TABLE>

        Deferred tax assets are comprised of the following:

<TABLE>
<CAPTION>
                                                          AS OF DECEMBER 31,
                                                     ---------------------------
                                                       1999               1998
                                                     --------           --------
                                                             (IN THOUSANDS)
<S>                                                  <C>                <C>
Reserves not currently deductible .........          $  6,600           $  4,824
Deferred income ...........................               603                985
Net operating loss and credit carryforwards             6,905              6,682
Other .....................................               961              1,245
                                                     --------           --------
Total net deferred taxes ..................            15,069             13,736
Deferred tax assets valuation allowance ...           (15,069)           (13,736)
                                                     --------           --------
                                                     $     --           $     --
                                                     ========           ========
</TABLE>

        The deferred tax assets valuation allowance at December 31, 1999 and
1998 is attributable to federal and state deferred tax assets. Management
believes that sufficient uncertainty exists with regard to the realizability of
these tax assets such that a full valuation allowance is necessary. These
factors include the lack of a significant history of consistent profits and the
lack of carryback capacity to realize these assets. Based on this 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 the
Company's net deferred tax assets. At December 31, 1999, the Company had Federal
net operating loss carryforwards of approximately $11.5 million which expire in
2019. This amount includes approximately $2.5 million of net operating loss
carryforwards from the acquisition of Concept which are generally limited to a
utilization of approximately $.2 million per year. The net operating loss
carryforward also includes approximately $.7 million resulting from employee
exercises of non qualified stock options or disqualifying dispositions, the tax
benefits of which, when realized, will be accounted for as an addition to
additional paid in capital rather than as a reduction of the provision for
income taxes. The deferred tax assets related to the acquisition of Concept,
approximately $2.5 million as of December 31, 1999, if and when realized will be
used to reduce the amount of goodwill and intangibles recorded at the date of
acquisition. Federal and state research and development credit carryforwards of
approximately $1.7 million are also available to reduce future Federal and state
income taxes and expire in 2011 to 2019. 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 which can be utilized.

8. EMPLOYEE BENEFIT PLANS

RETIREMENT/SAVINGS PLAN

        The Company has a retirement/savings plan, which qualifies as a thrift
plan under section 401(k) of the Internal Revenue Code. All 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 20% of the total compensation that
would otherwise be paid to the participant, not to exceed the amount allowed by
applicable Internal Revenue Service guidelines. The Company may make a
discretionary matching contribution equal to a percentage of the participant's
contributions. In 1999, the Company made a matching contribution of $226,000 and
in 1998, the Company made a matching contribution of $197,000. There were no
matching contributions in 1997.

PROFIT SHARING PLAN

        The Company has a profit sharing plan, wherein, as determined by the
board of directors, a percentage of income from operations is accrued and
distributed to all employees excluding management. The total charge to
operations under the profit sharing plan was approximately $80,000 for the year
ended December 31, 1999, $0 for 1998, and $85,000 for 1997.



                                       42
<PAGE>   43

9. NET INCOME (LOSS) PER SHARE

        SFAS No. 128 requires dual presentation of basic and diluted earnings
per share on the face of the income statement. Basic EPS is computed by dividing
income (loss) available to common stockholders (numerator) by the weighted
average number of common shares outstanding (denominator) for the period.
Diluted EPS gives effect to all dilutive potential common shares outstanding
during the period. The computation of diluted EPS uses the average market prices
during the period. All amounts in the following table are in thousands except
per share data.

<TABLE>
<CAPTION>
                                                                                          YEAR ENDED DECEMBER 31,
                                                                               ----------------------------------------------
                                                                                 1999               1998               1997
                                                                               --------           --------           --------
<S>                                                                            <C>                <C>                <C>
NET INCOME ..........................................................          $   (849)          $(22,367)          $  1,431
BASIC EARNINGS (LOSS) PER SHARE:
  Income available to common shareholders ...........................          $   (849)          $(22,367)          $  1,431
  Weighted average common shares outstanding ........................            15,730             14,720             14,117
                                                                               --------           --------           --------

  Basic earnings (loss) per share ...................................          $  (0.05)          $  (1.52)          $   0.10
                                                                               ========           ========           ========
DILUTED EARNINGS (LOSS) PER SHARE:
  Income available to common shareholders ...........................          $   (849)          $(22,367)          $  1,431
  Weighted average common shares outstanding ........................            15,730             14,720             14,117

  Diluted potential common shares from stock options ................                --                 --              1,194
                                                                               --------           --------           --------

  Weighted average common shares and dilutive potential common shares            15,730             14,720             15,311
                                                                               --------           --------           --------

  Diluted earnings (loss) per share .................................          $  (0.05)          $  (1.52)          $   0.09
                                                                               ========           ========           ========
</TABLE>

        Total stock options outstanding at December 31, 1999 of 3,143,000 and at
December 31, 1998 of 3,084,000 and options to purchase 221,000 weighted shares
outstanding during 1997 were excluded from the computations of diluted earnings
(loss) per share because of their anti-dilutive effect on diluted earnings
(loss) per share.

10. CERTAIN TRANSACTIONS

        The Company has a distribution agreement with Marubeni Solutions Corp.,
a Japanese distributor. The Company formed a subsidiary in Japan in October 1995
in which Marubeni has a 19% minority interest. In 1999, the Company shifted its
strategy to a direct sales model. The Company is in the process of terminating
its distribution relationship with Marubeni and establishing its own sales force
in Japan.

        The following is a summary of the Company's transactions with Marubeni
(in thousands):

<TABLE>
<CAPTION>
                                                                    YEAR ENDED DECEMBER 31,
                                                          -------------------------------------------
                                                            1999              1998              1997
                                                          -------           -------           -------
<S>                                                       <C>               <C>               <C>
Net sales to the distributor for the period ....          $10,706           $ 9,289           $ 9,987
Percentage of net sales ........................             10.3%             15.7%             13.0%
Accounts receivable at period end ..............          $   803           $ 2,103           $ 1,555
Deferred income at period end ..................          $   591           $   591           $   591
Minority interest in joint venture at period end          $   159           $   180           $   200
</TABLE>


        Upon termination of the distribution agreement, the Company may be
required to repurchase up to a maximum of $1,000,000 of inventory related to the
Company's sales to Marubeni. The Company recorded deferred income at the time of
sale to cover this right of return. At December 31, 1999 and 1998, deferred
income of $591,000 related to this agreement resulted from deferred revenue of
$1,000,000, less the estimated inventory value to the Company of $409,000.

        The Company purchases certain inventory parts from a supplier company,
which is majority owned by the Chief Executive Officer of the Company. Net
purchases were $680,000 for the year ended December 31, 1999, $363,000 for 1998
and $739,000 for 1997.

11. REPORTABLE SEGMENTS

        SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" supersedes SFAS No. 14, "Financial Reporting for Segments of a
Business Enterprise", replacing the "industry segment" approach with the
"management" approach. SFAS No. 131 establishes standards for reporting
information about operating segments in financial statements. Operating segments
are defined as components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker, or chief decision making group, in deciding how to allocate
resources and in assessing performance. Brad Mattson, Chairman and Chief
Executive Officer of the Company, is the Company's chief decision maker. As the
Company's business is completely focused on one industry segment, design,
manufacturing and marketing of advanced fabrication equipment to the



                                       43
<PAGE>   44

semiconductor manufacturing industry, management believes that the Company has
one reportable segment. The Company's revenues and profits are generated through
the sale and service of products for this one segment.

        The following is net sales information by geographic area for the years
ended December 31 (in thousands):

<TABLE>
<CAPTION>
                         1999              1998              1997
                       --------          --------          --------
<S>                    <C>               <C>               <C>
United States          $ 30,428          $ 19,395          $ 26,831
Japan .......            10,706             9,289             9,987
Taiwan ......            20,173            14,057            21,634
Korea .......            22,081             2,247             2,798
Singapore ...             8,441             3,845            10,961
Europe ......            11,629            10,353             4,519
                       --------          --------          --------
                       $103,458          $ 59,186          $ 76,730
                       ========          ========          ========
</TABLE>

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

        For the 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. The
Company had sales to one customer of 11% of net sales in 1997 and 20% of net
sales to another customer in 1999. In 1998, no sales to a single customer
exceeded 10% of net sales.

12. FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK

CURRENCY SWAP CONTRACTS

        Currency swap contracts are entered into primarily to hedge against the
short term impact of fluctuations in the Yen-denominated monetary assets of the
Company's subsidiary in Japan. At December 31, 1999, the Company had a contract
to sell 21.0 million Yen ($200,000) which matures in 2000. Because the impact of
movements in currency exchange rates on currency swap contracts offsets the
related impact on the underlying items being hedged, these financial instruments
do not subject the Company to speculative risk that would otherwise result from
changes in currency exchange rates. Net foreign currency unrealized transaction
gains and losses as of December 31, 1999 and realized transaction gains and
losses to date have not been material.

CONCENTRATION OF CREDIT RISK

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

        The Company invests in a variety of financial instruments such as
certificates of deposit, corporate bonds and treasury bills. The Company limits
the amount of credit exposure to any one financial institution or commercial
issuer.

        The fair values of the Company's cash and cash equivalents and short
term investments are not significantly different than cost. All short term
investments mature within one year.

        The Company's trade accounts receivable are derived from sales in the
United States, Japan, other Pacific Rim countries and Europe. The Company
performs ongoing credit evaluations of its customers (semiconductor
manufacturers and its Japanese distributor) and to date has not experienced any
material losses.

        The Company is exposed to credit loss in the event of non performance by
counterparties on the currency swap contracts used in hedging activities. The
Company does not anticipate nonperformance by these counterparties.



                                       44
<PAGE>   45

13. COMMITMENTS AND CONTINGENCIES

        The Company leases its facilities under operating leases, which expire
at various dates through 2003, with minimum annual rental commitments as follows
(in thousands):

<TABLE>
<S>                                                         <C>
2000.....................................................   $1,722
2001.....................................................      856
2002.....................................................      709
2003.....................................................      236
2004.....................................................       --
                                                            ------
                                                            $3,523
                                                            ======
</TABLE>

        Rent expense was $1,932,000 for 1999, $2,009,000 for 1998, and
$1,755,000 for 1997.

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

14. SUBSEQUENT EVENTS (UNAUDITED)

        On January 28, 2000, the Company filed a registration statement with the
Securities and Exchange Commission ("SEC") relating to a proposed underwritten
public offering of up to 3.45 million shares of the Company's common stock. The
net proceeds of approximately $100 million are expected to be used for general
corporate purposes, principally working capital and capital expenditures.



                                       45
<PAGE>   46

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Mattson Technology, Inc.:

        We have audited the accompanying consolidated balance sheet of Mattson
Technology, Inc. and subsidiaries (a Delaware corporation) as of December 31,
1999 and the related consolidated statements of operations, stockholders' equity
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.

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

        In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Mattson Technology,
Inc. and subsidiaries as of December 31, 1999 and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.

                                            /s/ Arthur Andersen LLP
                                            Arthur Andersen LLP

San Jose, California
January 21, 2000



                                       46
<PAGE>   47

                        REPORT OF INDEPENDENT ACCOUNTANTS

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

        In our opinion, the accompanying consolidated balance sheet and the
related consolidated statements of operations, of stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Mattson Technology, Inc. and its subsidiaries at December 31, 1998 and the
results of their operations and their cash flows for each of the two years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, 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 the opinion expressed above.

/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP

San Jose, California
February 9, 1999



                                       47
<PAGE>   48

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

        Not applicable.

                                    PART III


ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

        The information required by this item will be set forth in the 2000
Proxy Statement under the captions "Election of Directors" and "Additional
Information" and is incorporated herein by reference.


ITEM 11.  EXECUTIVE COMPENSATION

        The information required by this item will be set forth in the 2000
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 security ownership of management will be set forth in the 2000 Proxy
Statement under the caption "Security Ownership of Management and Principal
Stockholders" and is incorporated herein by reference.


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        The information that is required by this item will be included in the
2000 Proxy Statement under the caption "Certain Relationships and Related
Transactions" and is incorporated herein by reference.

                                     PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

        (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 31.

        (a)(2) Financial Statement Schedules

                 All financial statement schedules are omitted because they are
                 either not applicable or the required information is shown in
                 the consolidated financial statements or notes thereto.

        (a)(3) Exhibits

<TABLE>
<CAPTION>
                                                               Management Contract
Exhibit                                                        or Compensatory Plan
Number                Description                              or Arrangement            Notes
- ------                -----------                              --------------        -------------
<S>      <C>                                                   <C>                   <C>
  3.1*    Restated Articles of Incorporation of the Company                                (1)
  3.2*    Bylaws of the Registrant                                                         (1)
  4.1*    Form of Stock Certificate                                                        (1)
 10.1*    Marubeni Japanese Distribution Agreement, as amended                             (2)
 10.2*    1989 Stock Option plan, as amended                           C                   (3)
 10.3*    1994 Employee Stock Purchase Plan                            C                   (1)
 10.4*    Form of Indemnification Agreement                            C                   (1)
 21.1     Subsidiaries of Registrant
 23.1     Consent of Independent Public Accountants
 23.2     Consent of Independent Accountants
 24.1     Power of Attorney (See page 49 of this form 10-K)
 27       Financial Data Schedule
</TABLE>

(1)     Incorporated by reference to the corresponding Exhibit previously filed
        as an Exhibit to the Registrant's Registration Statement on Form S-1
        filed August 12, 1994 (33-92738), as amended.

(2)     Incorporated by reference to the corresponding Exhibit previously filed
        as an Exhibit to Registrant's Form 10-K for fiscal year 1997.

(3)     Incorporated by reference to the corresponding Registrant's Registration
        Statement on Form S-8 filed October 31, 1997 (333-39129).


                 The 2000 Proxy Statement shall be deemed to have been "filed"
                 only to the extent portions thereof are expressly incorporated
                 herein by reference. Copies of the exhibits listed in the
                 Exhibit Index will be furnished, upon request, to holders or
                 beneficial owners of the Company's Common Stock.

                 Each management contract or compensatory plan or arrangement
                 listed in the Exhibit Index has been marked with the letter "C"
                 to identify it as such.

        (b) Reports on Form 8-K

                 On November 5, 1999, the Registrant filed a report on Form 8-K
                 in connection with a change in the Registrant's Independent
                 Public Accountant.



                                       48
<PAGE>   49

                                   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: / s/ Brad Mattson             February 14, 2000
                                ---------------------------
                                Brad Mattson
                                Chief Executive Officer


KNOW ALL PERSONS BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints Brad Mattson and Brian McDonald, 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.


<TABLE>
<S>                                 <C>                                        <C>
/s/ BRAD MATTSON                    Chief Executive                            February 14, 2000
- -----------------------------       Officer and Director
Brad Mattson                        (Principal Executive Officer)

/s/ BRIAN MCDONALD                  Vice President - Finance                   February 14, 2000
- -----------------------------       and Chief Financial Officer
Brian McDonald                      (Principal Financial and
                                    Accounting Officer)

/s/ JOHN SAVAGE                     Director                                   February 14, 2000
- -----------------------------
John Savage


/s/ SHIGERU NAKAYAMA                Director                                   February 14, 2000
- -----------------------------
Shigeru Nakayama


/s/ KENNETH SMITH                   Director                                   February 14, 2000
- -----------------------------
Kenneth Smith


/s/ KENNETH KANNAPPAN               Director                                   February 14, 2000
- -----------------------------
Kenneth Kannappan
</TABLE>



                                       49
<PAGE>   50

                                  EXHIBIT INDEX


The following Exhibits to this report are filed herewith, or if marked with an
asterisk (*), are incorporated herein by reference. Each management contract or
compensatory plan or arrangement has been marked with the letter "C" to identify
it as such.



<TABLE>
<CAPTION>
                                                               Management Contract
Exhibit                                                        or Compensatory Plan
Number                Description                              or Arrangement            Notes
- ------                -----------                              --------------        -------------
<S>      <C>                                                   <C>                   <C>
  3.1*    Restated Articles of Incorporation of the Company                                (1)
  3.2*    Bylaws of the Registrant                                                         (1)
  4.1*    Form of Stock Certificate                                                        (1)
 10.1*    Marubeni Japanese Distribution Agreement, as amended                             (2)
 10.2*    1989 Stock Option plan, as amended                           C                   (3)
 10.3*    1994 Employee Stock Purchase Plan                            C                   (1)
 10.4*    Form of Indemnification Agreement                            C                   (1)
 21.1     Subsidiaries of Registrant
 23.1     Consent of Independent Public Accountants
 23.2     Consent of Independent Accountants
 24.1     Power of Attorney (See page 49 of this form 10-K)
 27       Financial Data Schedule
</TABLE>

(1)     Incorporated by reference to the corresponding Exhibit previously filed
        as an Exhibit to the Registrant's Registration Statement on Form S-1
        filed August 12, 1994 (33-92738), as amended.

(2)     Incorporated by reference to the corresponding Exhibit previously filed
        as an Exhibit to Registrant's Form 10-K for fiscal year 1997.

(3)     Incorporated by reference to the corresponding Registrant's Registration
        Statement on Form S-8 filed October 31, 1997 (333-39129).

                                       50

<PAGE>   1

                                                                    EXHIBIT 21.1


                            MATTSON TECHNOLOGY, INC.

                         SUBSIDIARIES OF THE REGISTRANT




                           MATTSON INTERNATIONAL, INC.
                         MATTSON TECHNOLOGY CENTER K.K.
                           MATTSON INTERNATIONAL GMBH
                         MATTSON INTERNATIONAL KOREA CO.
                    MATTSON TECHNOLOGY OF SINGAPORE PTE. LTD.
                          CONCEPT SYSTEMS DESIGN, INC.







                                       51

<PAGE>   1

                                                                    EXHIBIT 23.1



                    CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the incorporation by
reference of our report included in this Annual Report on Form 10-K, into the
Company's previously filed Registration Statement Nos. 333-87715, 333-39129,
333-59859, 33-85272 and 33-94972 on Form S-8.


/s/ ARTHUR ANDERSEN LLP
- -------------------------
Arthur Andersen LLP

San Jose, California
February 14, 2000





                                       52

<PAGE>   1

                                                                    EXHIBIT 23.2



                       CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 333-87715, No. 333-39129, No. 333-59859, No.33-85272
and No. 33-94972) of Mattson Technology, Inc of our report dated February 9,
1999 relating to the financial statements, which appears in this Form 10-K.


/s/ PricewaterhouseCoopers LLP
- --------------------------------
PricewaterhouseCoopers LLP

San Jose, California
February 14, 2000




                                       53

<TABLE> <S> <C>

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AND CONDENSED CONSOLIDATED STATEMENT OF
OPERATIONS FOUND ON PAGES 31 AND 32 OF THE COMPANY'S FORM 10K FOR THE YEAR ENDED
DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S>                             <C>
<PERIOD-TYPE>                   YEAR
<FISCAL-YEAR-END>                          DEC-31-1999
<PERIOD-START>                             JAN-01-1999
<PERIOD-END>                               DEC-31-1999
<CASH>                                          16,965
<SECURITIES>                                         0
<RECEIVABLES>                                   21,500
<ALLOWANCES>                                         0
<INVENTORY>                                     25,374
<CURRENT-ASSETS>                                66,138
<PP&E>                                          11,260
<DEPRECIATION>                                       0
<TOTAL-ASSETS>                                  81,148
<CURRENT-LIABILITIES>                           29,129
<BONDS>                                              0
                                0
                                          0
<COMMON>                                        66,296
<OTHER-SE>                                    (14,277)
<TOTAL-LIABILITY-AND-EQUITY>                    81,148
<SALES>                                        103,458
<TOTAL-REVENUES>                               103,458
<CGS>                                           53,472
<TOTAL-COSTS>                                   53,472
<OTHER-EXPENSES>                                51,331
<LOSS-PROVISION>                                     0
<INTEREST-EXPENSE>                                   0
<INCOME-PRETAX>                                  (602)
<INCOME-TAX>                                       247
<INCOME-CONTINUING>                              (849)
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                     (849)
<EPS-BASIC>                                     (0.05)
<EPS-DILUTED>                                   (0.05)


</TABLE>



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