Applied Materials 2004 Annual Report

APPLIEDMATERIALS E W R E H T E G O T H G U O R H T K A E R B

2 0 0 4 ANNUAL REPORT FINANCIAL HIGHLIGHTS

Fiscal year 2002 2003 2 0 0 4

(In thousands, except percentages and per share amounts)

Net sales $ 5,062,312 $ 4,477,291 $ 8,013,053 Net income/(loss) $ 269,004 $ (149,147 ) $ 1,351,303 Net income/(loss) per diluted share $ 0.16 $ (0.09 ) $ 0.78 Weighted average common shares and equivalents 1,701,557 1,659,557 1,721,645 Stockholders’ equity $ 8,019,649 $ 8,068,034 $ 9,262,027 Return on equity* 3.4% (1.9)% 15.6% Order backlog $ 3,190,459 $ 2,495,115 $ 3,368,382

* Based on net income.

NEW ORDERS NET SALES EARNINGS (In millions) (In millions) PER SHARE* 8 6 0.7 6,142 4,318 8,982 5,062 4,477 8,013 0.1 (0.09) $ $ $ $ $ $ $ $ $ 04 04 04 2002 2003 2002 2003 2002 2003 20 20 20

CORPORATE PROFILE

Applied Materials is the largest supplier of manufacturing systems and wet cleaning; maskmaking equipment; CVD and test systems used to related services to the global semiconductor industry. The Company produce fl at panel displays (FPDs); and manufacturing execution supplies wafer fabrication systems that perform atomic layer deposition system (MES) software for semiconductor factory automation. Applied’s (ALD), chemical vapor deposition (CVD), physical vapor deposition (PVD), service products include equipment maintenance, materials supply epitaxial and polysilicon deposition, rapid thermal processing (RTP), and management, parts refurbishment, equipment remanufacturing, plasma etching, electrochemical plating (ECP), ion implantation, yield enhancement, and other solutions for increasing semiconductor metrology, inspection, chemical mechanical polishing (CMP) and wafer manufacturing productivity. TO OUR STOCKHOLDERS,

Applied Materials’ performance for the 2004 fi scal year was outstanding. We made substantial gains in our agenda to grow our Company, broaden our served markets and deliver innovative new products and services.

Thanks to the great work of our employees, PRODUCT MOMENTUM we developed breakthrough technologies The semiconductor and semiconductor that are changing the world by enabling new equipment industries continue to move at generations of more powerful and affordable a rapid pace. The changing needs of our semiconductor chips. We advanced our customers provide many opportunities for leadership position in both technology and continuing our growth. Our engineers and market share, enhanced our product quality technologists, the lifeblood of our Company, and delivered excellent fi nancial results. are solving the industry’s most diffi cult JAMES C. MORGAN MICHAEL R. SPLINTER In fi scal 2004, Applied Materials’ revenue technical problems. Our innovative solutions Chairman of the President and Board of Directors Chief Executive Offi cer accelerated to $8.01 billion, the second continue to drive Moore’s Law, which highest level in its history and 79 percent predicts the doubling of chip capability higher than our prior year’s performance. on average every two years. Driven by strong semiconductor demand, Increasing Market Share in Existing Products new orders increased 108 percent, to $8.98 While the wafer fab equipment market billion, as the industry continued a major grew approximately 60 percent last year, retooling and invested in 300 millimeter (mm) our Company outpaced the industry growth wafer fabrication equipment while still rate, increasing market share in our broad adding 200mm production capacity. Net product portfolio. Customers have already income for the year was $1.35 billion, or produced nearly a million wafers using $0.78 per diluted share, operating margin our advanced Applied Producer Black was 22 percent of revenue, and net income Diamond low κ dielectric system. We (after tax) reached 17 percent of revenue. achieved a key product milestone this year We enhanced our fi nancial position by gen- with the shipment of our 750th Applied erating $1.63 billion of cash from operations Producer CVD (chemical vapor deposition) and ended the year with $6.58 billion in system. Also, since its introduction in 1990, cash and short-term investments. In addition, we have delivered nearly 3,500 Applied we expanded the stock repurchase program, Endura systems to customers worldwide, buying back $650 million worth of our shares making it the industry’s most successful during the year. This is compared to an semiconductor processing system. Our average annual share repurchase of approxi- Company also made tremendous strides mately $200 million over the prior fi ve years. in etch, metrology, inspection and Building on our core strengths of a broad equipment for fl at panel displays. We and deep base of technology, products and accomplished this growth while winning services, an advanced global distribution recognition from customers around the system, and a solid fi nancial foundation, world for improved quality. Applied Materials ended fi scal 2004 as a stronger competitor and a proven partner for our customers. LETTER TO OUR STOCKHOLDERS (continued) APPLIED PRODUCER CVD PRODUCER APPLIED ECMP LK REFLEXION APPLIED FIB G2 SEMVISION APPLIED

Delivering Products for the Nanometer Era mechanical planarization capability to the needs of this market by expanding our This past year, the semiconductor industry provide an extendible, cost-effective solu- service product offerings to include fab-wide, moved into the realm of “nanotechnology,” tion for copper/low κ manufacturing at the multi-vendor capabilities for semiconductor producing chips with features 1,000 times 65nm node and below. During the year, we fab operation support. Our goal is to smaller than the diameter of a human hair. launched a new generation of our acclaimed provide increased value to customers with To meet these rigorous manufacturing Applied Endura platform, the Applied customized, quality solutions that combine requirements we launched ten breakthrough Endura2, which sets the standard for 300mm effi ciency and reliability with our equipment products, supplying an even broader set of high-volume manufacturing. and process expertise, while broadening technologies that will enable our customers’ our total served market. In metrology and inspection we launched products to reach sub-65nm dimensions. two products aimed at 65nm and below SOLUTIONS FOR A Moore’s Law continues to set the direction device structures. The Applied SEMVision CHANGING INDUSTRY for the semiconductor industry with G2 FIB (focused ion beam) system brings a The semiconductor industry continued to transistors becoming an even more critical unique capability to boost production experience new challenges in 2004 as a factor in extending chip dimensions to 65nm effi ciency, yield and fab productivity, while number of trends converged, adding to the and below. Applied Materials has taken a the Applied VeritySEM metrology system complexity of chipmaking. The move to leadership role in developing technologies improves customers’ ability to control critical larger-sized wafers is accelerating. These that the industry requires to stay on track. lithography dimensions and etch processes. 300mm systems now generate around Our recently introduced Applied Quantum X For fl at panel displays, we introduced 12 percent of total semiconductor manufac- single-wafer ion implanter and Applied breakthrough technology—a CVD system turing capacity and there are approximately Vantage RadiancePlus systems pave the way and an electron beam array tester—for 40 additional 300mm factory projects for transistor scaling to the 65nm node. manufacturing 7th generation substrates and underway or about to be launched. While Our benchmark Applied Centura RP helping our customers’ rapid penetration wafers are getting bigger, dimensions on (reduced pressure) Epi systems, along with into the large-screen fl at panel TV market. the chip continue to shrink into the realm our new Applied Producer HARP (high aspect Entering New Markets of nanotechnology and the number of pro- ratio process) systems, are being used for Strategic agreements with several companies cess steps required in chip manufacturing an exciting area in transistor performance and the acquisition of others have opened continues to rise. Leveraging these changes, optimization—strain engineering. Applied the door to new markets. The FlexStar system smaller feature sizes deliver more capability Materials’ ability to deposit precisely from Torrex, with its multi-wafer architecture, at ever-lower costs per unit area. engineered thin fi lms both above and below enhances our ability to compete in the the transistor gate area enables faster chip Customers in Asia, the source of more than expanding ALD (atomic layer deposition) speed and reduces power consumption on 70 percent of our revenue in fi scal 2004, market for advanced applications. These new the order of 30-70 percent. With our innova- are investing in new capabilities to gain the ventures, and others to come, will allow us tive equipment and process technologies, productivity advantages that 300mm systems to further broaden our relationships with our Company is in the unique position of deliver. China, which uses approximately customers while continuing to grow and supplying the broadest range of solutions 15 percent of the world’s semiconductors create long-term value for our stockholders. to boost semiconductor performance. but produces only 20 percent of its internal Today, our customers seek partners to help demand, is a strategic opportunity that We also continued to deliver breakthrough them improve the effectiveness of their is contributing to our growth. In fi scal 2004, technology for building the wiring portion operating expenditures—a market potential we celebrated our 20th anniversary of the integrated circuit. Our revolutionary of about $40 billion. The acquisition of of operations in China and our business Applied Refl exion LK Ecmp system Metron Technology positions us to meet exceeded $800 million. introduced an innovative electro-chemical AKT PECVD SYSTEM PECVD AKT RADIANCE VANTAGE APPLIED ETCH ENABLER CENTURA APPLIED PLUS

We were the fi rst semiconductor equipment of effi ciency. We continued to streamline By enabling semiconductor manufacturing company to establish a presence there, and order fulfi llment, reducing cycle time from at lower cost, we expand the potential ap- our long-standing relationships and under- purchase order through manufacturing plications for chips and widen the market of standing of that market have contributed to and installation by 22 percent. This is a key consumers around the world who can our strong position in this large and high- advantage for customers, enabling them benefi t from improved access to information potential region. to deliver products to market faster. and the added capabilities of advanced electronic devices. INVENTING THE FUTURE WITH With a focus on consistently improving BREAKTHROUGH TECHNOLOGIES quality in our products, we launched Fiscal 2005 is expected to start out slower, As the industry begins moving to 65nm and an effort in 2002 to make a 2x improvement as the semiconductor market shows signs of below dimensions, these shrinking geome- in our quality every 12 months. Our efforts softening. There will be numerous challenges tries and escalating performance require- paid off in 2004 with system reliability to our business model. However, we remain ments have greatly increased the number of reaching a new milestone, despite the confi dent that the applications for silicon materials used in making chips. New materi- increasing complexity of our products. These technology have only begun to be tapped, als require a greater level of expertise to continued improvements resulted in our and our opportunity for growth continues as integrate the hundreds of manufacturing receiving high customer satisfaction scores we implement our strategies and broaden our steps that are required to economically and numerous awards for product quality. business. We are proud of our performance produce generations of more powerful semi- We will continue our quality journey with a in 2004—performance we could not have conductors. Our state-of-the-art Maydan push to make another 2x improvement in delivered without the dedication of our Technology Center, located in Silicon Valley, the coming year. employees and the strong support of our customers, suppliers and stockholders. We provides a unique set of capabilities to help Our solid operational achievements are share a commitment to growth and success. bring our Company and customers together accompanied by a corporate governance Together, we are providing the breakthrough to advance future chipmaking technologies. system that is a leader in our industry. technology and service excellence that will We are speeding the way in which innovation We take our responsibility to stockholders further advance the Nanometer Era. in our labs is cost-effectively translated into seriously, as demonstrated by our long- new capabilities for customers. Research, standing ethics policies and Standards of development and engineering (RD&E) Business Conduct. Consistent with investment increased to $992 million in 2004 Sarbanes-Oxley, the corporate reform act, and it remains an unwavering commitment we believe strong internal controls and of our Company. Our relentless development effective business processes are essential of leading-edge technologies resulted in and allow our stakeholders to have continued MICHAEL R. SPLINTER more than 400 U.S. patents being granted confi dence in our Company’s performance. during fi scal 2004. President and Chief Executive Offi cer LOOKING AHEAD IMPROVING EFFICIENCY AND New generations of chips, with added capa- DELIVERING RESULTS bilities, will unlock potential markets that Careful planning, disciplined business pro- have yet to benefi t fully from silicon tech- cesses and an improved operating model nology. From biotech to new solutions for JAMES C. MORGAN allowed us to increase revenue and at the ecology, security and privacy, the potential Chairman of the Board of Directors same time enhance productivity. For fi scal applications of chips extend well beyond 2004, revenue per employee jumped 108 today’s market-drivers of computing, percent to more than $661,000—a new level communications and consumer products. STOCKHOLDERS’ INFORMATION

LEGAL COUNSEL Orrick, Herrington & Sutcliffe LLP CORPORATE HEADQUARTERS San Francisco, California Applied Materials, Inc. 3050 Bowers Avenue INDEPENDENT REGISTERED PUBLIC Santa Clara, California 95054-3298 ACCOUNTING FIRM KPMG LLP MAIL ADDRESS AND TELEPHONE Mountain View, California Applied Materials, Inc. 3050 Bowers Avenue NUMBER OF REGISTERED STOCKHOLDERS P.O. Box 58039 6,734 (as of October 31, 2004) Santa Clara, California 95052-8039 Tel: (408) 727-5555 STOCK LISTING Fax: (408) 748-9943 Applied Materials, Inc. is traded on The NASDAQ Stock Market®, CORPORATE WEBSITE NASDAQ Symbol: AMAT Additional information can be found on the Applied Materials corporate website at TRANSFER AGENT www.appliedmaterials.com. Computershare Investor Services, LLC Stockholder Services P.O. Box A3504 Chicago, Illinois 60690 (312) 360-5186 (877) 388-5186 [email protected]

INVESTOR CONTACT Investor Relations Applied Materials, Inc. 3050 Bowers Avenue P.O. Box 58039, M/S 2038 Santa Clara, California 95052-8039 (800) 882-0373 (408) 748-5227 [email protected] www.appliedmaterials.com

This 2004 Annual Report contains forward-looking statements, confi dence, demand for electronic products and semiconductors, including but not limited to statements regarding Applied Materials’ and geopolitical uncertainties; customers’ capacity requirements, growth opportunities, equipment and service product capabilities, including capacity utilizing the latest technology, which depend in part competitive position, technological leadership, business strategies, on customers’ inventory levels relative to demand for their products; strategic transactions and acquisitions, and internal controls and the timing, rate, amount and sustainability of capital spending for new processes; customers’ investments in manufacturing capacity and new technology, such as 300mm and sub-100 nanometer applications; the technology; the outlook for the semiconductor and semiconductor Company’s ability to develop, deliver and/or support a broad range of equipment industries; and all other statements that are not historical products and services on a timely basis; the Company’s successful and facts. Forward-looking statements may be identifi ed by words such as timely development of new markets, products, processes and services; “may,” “will,” “should,” “expect,” “plan,” “believe” and “continue,” or the Company’s ability to maintain effective cost controls and to timely the negative of these terms, and include the assumptions that underlie align its cost structure with business conditions; the successful integration such statements. These statements are subject to known and unknown and performance of acquired businesses; the effectiveness of strategic risks and uncertainties that could cause actual results to differ materially transactions; changes in management; and other risks described in from those expressed or implied by such statements, including but Applied Materials’ fi lings with the SEC. All forward-looking statements not limited to: the sustainability of demand in the semiconductor and are based on management’s estimates, projections and assumptions semiconductor equipment industries, which is subject to many factors, as of the date hereof and Applied Materials assumes no obligation to including global economic conditions, business spending, consumer update any forward-looking statements. APPLIEDMATERIALS

MISSION GLOBAL LEADERSHIP

Applied Materials’ mission is to be Values Market Leadership the leading supplier of semiconductor Build a culture of achievement based on a Early leaders win. Focus on markets where fabrication solutions worldwide— set of core values—Close to the Customer, it’s possible to take the leadership share. through innovation and enhancement Mutual Trust and Respect, World-Class of customer productivity with systems Performance—shared by employees Global Presence and service solutions. around the world. Control our destiny in global markets with strong local management and capabilities. World-Class Workforce Attract, retain and develop the best Management Excellence people in the world and provide a global Develop a capable management team knowledge base for collaboration and that can translate vision into performance. effective decision-making. Leverage scale and profi tability to invest Vision of Innovation strategically. Create a shared vision and commitment to innovation in all organizations and activities. ELECTRONIC PROXY DELIVERY

Applied Materials is We encourage you to take advantage pleased to offer you of these convenient online services: the opportunity to • Electronic delivery of the Proxy electronically receive Statement, Annual Report and future Proxy Statements related materials and Annual Reports • Online proxy voting over the internet. Electing to receive these materials online saves in two important ways. It conserves natural resources and allows us to trim operational costs associated with printing and mailing.

To enroll in the online program, go to Applied Materials’ website, www.appliedmaterials.com. Click on “Get your proxy statement online” to request electronic enrollment. Follow the directions provided to complete your enrollment. This will remain in effect as long as your account remains active or until you cancel your enrollment. BOARD OF DIRECTORS CORPORATE MANAGEMENT

James C. Morgan James C. Morgan Wendell Blonigan Chairman Chairman of the Board of Directors Vice President, General Manager Applied Materials, Inc. Display Business Products (AKT) Michael R. Splinter Michael R. Splinter President and Chief Executive Offi cer George Davis President and Chief Executive Offi cer Vice President, Treasurer Applied Materials, Inc. Dan Maydan President Emeritus Menachem Erad Dan Maydan Group Vice President, President Emeritus Franz Janker Strategic Planning and New Technology Applied Materials, Inc. Executive Vice President, Sales and Marketing Bradley L. Hansen Michael H. Armacost 1,2,4 Vice President, General Manager Shorenstein Distinguished Fellow David N.K. Wang Planarization, Plating and Clean, Asia/Pacifi c Research Center, Executive Vice President, President Thin Films Product Business Group Stanford University Applied Materials Asia John Hoffman Deborah A. Coleman1,2 Nancy H. Handel Vice President, Chief Information Offi cer General Partner Senior Vice President, SmartForest Ventures LLC Chief Financial Offi cer Ray Leubner Vice President, Manufacturing Herbert M. Dwight, Jr.2,3,5 Manfred Kerschbaum Chief Executive Offi cer Senior Vice President, General Manager Jeannette Liebman Optical Coating Laboratory, Inc. Applied Global Services Vice President, Global Human Resources (retired) Farhad Moghadam Craig Lowrie Philip V. Gerdine1,2 Senior Vice President, General Manager Vice President, General Manager Executive Director (Overseas Acquisitions) Thin Films Product Business Group Implant Division, Front End Products Siemens AG (retired) and Foundation Engineering Business Group

Paul R. Low 2,3 Mark Pinto William H. McClintock Chief Executive Offi cer Chief Technology Offi cer and Vice President, Business Management, P.R.L. Associates Senior Vice President, Thin Films Product Business Group New Business and New Products Group Steven L. Miller 2,3 Seiji Sato Chairman and President Ashok K. Sinha Vice President and Representative Director, SLM Discovery Ventures, Inc. Senior Vice President, General Manager Applied Materials Japan Etch Products Business Group Chairman, President and Joseph J. Sweeney Chief Executive Offi cer George Alajajian Group Vice President, Legal Affairs Shell Oil Company (retired) Vice President, Operations Manager and Intellectual Property and Gerhard H. Parker 1,2 Thin Films Product Business Group Corporate Secretary and Foundation Engineering Executive Vice President, Avi Tepman New Business Group Gilad Almogy Vice President, New Disruptive Products Intel Corporation (retired) Vice President, General Manager Randhir Thakur Willem P. Roelandts 2,3 Process Diagnostics and Control Product Business Group Group Vice President, General Manager Chairman, President and Front End Products Business Group Chief Executive Offi cer David Bergeron Xilinx, Inc. Vice President, Manager Yvonne Weatherford Corporate Asset Services Vice President, Corporate Controller BOARD ADVISOR Garry S. Berryman Vice President, Manager Tetsuo Iwasaki Global Materials Organization Chairman GPI, Inc.

1 Audit Committee 2 Corporate Governance and Nominating Committee © Applied Materials, Inc. 2005. Applied Materials, the Applied Materials logo and other trademarks so designated or 3 Human Resources and Compensation Committee otherwise indicated as product names or services, are trademarks of Applied Materials, Inc. in the U.S. and other countries. 4 Ethics Ombudsman All other product and service marks contained herein are the trademarks of their respective owners. All rights reserved. 5 Lead Independent Director Printed in the U.S.A. For external use. 5702001 01/05 486K

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Applied Endura2 system