UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)
[X]		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
		For the quarterly period ended: June 30, 2004

OR

Commission File Number 0-25434

BROOKS AUTOMATION, INC.

15 Elizabeth Drive
Chelmsford, Massachusetts

01824

Registrant’s telephone number, including area code: (978) 262-2400

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

Yes [X] No [  ]

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

Yes [X] No [  ]

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practical date, July 23, 2004:

BROOKS AUTOMATION, INC.

INDEX

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

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BROOKS AUTOMATION, INC.

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

4

BROOKS AUTOMATION, INC.

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

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BROOKS AUTOMATION, INC.

1.

Basis of Presentation

      The unaudited consolidated financial statements of Brooks Automation, Inc. and its subsidiaries (“Brooks” or the “Company”) included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, all material adjustments which are of a normal and recurring nature necessary for a fair presentation of the results for the periods presented have been reflected.

      The accompanying financial information should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K, filed with the United States Securities and Exchange Commission for the year ended September 30, 2003.

      Certain amounts in previously issued financial statements have been reclassified to conform to the current presentation.

      In January 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities” (“FIN 46R”), which clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements”, to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support and replaces FASB Interpretation No. 46. FIN 46R provides guidance on the identification of entities for which control is achieved through means other than through voting rights (“variable interest entities” or “VIEs”) and how to determine when and which business enterprise should consolidate the VIE. In addition, FIN 46R requires that both the primary beneficiary and all other enterprises with a significant variable interest in a VIE make additional disclosures. This interpretation was effective in financial statements of public entities that have interests in variable interest entities or potential variable interest entities commonly referred to as special-purpose entities for periods ending after December 15, 2003. Application of this pronouncement by public entities for all other types of entities, subject to FIN 46R, is required in financial statements for periods ending after March 15, 2004. The adoption of FIN 46R did not have an impact on the Company’s financial position or results of operations.

      In December 2003, the Staff of the Securities and Exchange Commission issued Staff Accounting Bulletin No. 104 (“SAB 104”), “Revenue Recognition”, which supersedes SAB 101, “Revenue Recognition in Financial Statements”. The primary purpose of SAB 104 is to rescind accounting guidance contained in SAB 101 related to multiple element revenue arrangements, superseded as a result of the issuance of EITF 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables.” Additionally, SAB 104 rescinds the SEC’s “Revenue Recognition in Financial Statements Frequently Asked Questions and Answers” (the “FAQ”) issued with SAB 101 that had been codified in SEC Topic 13, “Revenue Recognition”. Selected portions of the FAQ have been incorporated into SAB 104. While the wording of SAB 104 has changed to reflect the issuance of EITF 00-21, the revenue recognition principles of SAB 101 remain largely unchanged by the issuance of SAB 104. The adoption of SAB 104 had no impact on the Company’s financial position or results of operations.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — Continued

2.

Goodwill and Intangible Assets

      Components of the Company’s identifiable intangible assets are as follows (in thousands):

      The Company recorded amortization expense for its amortizable intangible assets of $0.9 million and $0.9 million for the three months ended June 30, 2004 and 2003, respectively, and $2.8 million and $3.9 million for the nine months ended June 30, 2004 and 2003, respectively. Amortization expense related to intangible assets as of June 30, 2004, is estimated as follows (in thousands):

      The changes in the carrying amount of goodwill for the nine months ended June 30, 2004 are as follows (in thousands):

      The Company issued 37,301 additional shares of its common stock as contingent consideration related to the Intelligent Automation Systems (“IAS”) acquisition in fiscal 2002 during the second quarter of fiscal 2004. IAS is included in the Specialty Equipment and Life Sciences division. The fair value of the common stock issued was calculated based upon the closing price of the Company’s common stock on the date of issuance.

      The Company cancelled 33,232 previously issued shares of its common stock related to PRI Canadian exchangeable shares for the PRI Automation, Inc. acquisition in fiscal 2002 during the third quarter of fiscal 2004. The fair value of the common stock issued was calculated based upon the closing price of the Company’s common stock on the date of issuance.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — Continued

3.

Earnings (Loss) per Share

      Below is a reconciliation of net income (loss) per share and weighted average common shares outstanding for purposes of calculating basic and diluted earnings (loss) per share (in thousands, except per share data):

      Certain options to purchase common stock and assumed conversions of the 4.75% Convertible Subordinated Notes due in 2008 into common stock totaling approximately 7.4 million shares of common stock and 7.6 million shares of common stock were excluded from the computation of diluted earnings (loss) per share for the three and nine months ended June 30, 2004, respectively, as their effect would be anti-dilutive. Certain options to purchase common stock and assumed conversions of the 4.75% Convertible Subordinated Notes due in 2008 into common stock totaling approximately 8.3 million shares of common stock and 10.0 million shares of common stock were excluded from the computation of diluted loss per share for the three and nine months ended June 30, 2003, respectively, as their effect would be anti-dilutive. These options and conversions could however become dilutive in future periods.

4.

Comprehensive Income (Loss)

      Comprehensive income (loss) for the Company is computed as the sum of the Company’s net income (loss), the change in the cumulative translation adjustment, the unrealized loss on the Company’s marketable securities and the unrealized gain on the Company’s investment in shares of the common stock of Shinsung (“Shinsung”). The Company’s investment in Shinsung common shares was sold in March 2003. The calculation of the Company’s comprehensive income (loss) for the three and nine months ended June 30, 2004 and 2003 is as follows (in thousands):

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BROOKS AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — Continued

5.

Common Stock Offering

      On December 16, 2003, the Company completed a public offering of 6,900,000 shares of its common stock. The Company received proceeds, net of $6.8 million of issuance costs, of $124.3 million on the sale of the common stock.

6.

Stock Based Compensation

      The Company’s employee stock compensation plans are accounted for in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and related interpretations. Under this method, no compensation expense is recognized as long as the exercise price equals or exceeds the market price of the underlying stock on the date of the grant. All non-employee stock-based awards are accounted for at fair value and recorded as compensation expense over the period of service in accordance with Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“FAS 123”) and related interpretations.

      The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure – an amendment of FASB Statement No. 123” (“FAS 148”). The following pro forma information regarding net income (loss) has been calculated as if the Company had accounted for its employee stock options and stock purchase plan using the fair value method under FAS 123. The fair value of each option grant was estimated on the date of grant, and the fair value of each employee stock purchase was estimated on the commencement date of each offering period, each using the Black-Scholes option-pricing model.

      For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting period. The Company’s pro forma information follows (in thousands, except per share information):

      Additional option grants are expected to be made subsequent to June 30, 2004, accordingly the results of applying the fair value method may have a materially different effect on pro forma net income (loss) in future periods.

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BROOKS AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — Continued

7.

Segment, Geographic Information and Significant Customers

      The Company has three reportable segments: equipment automation, factory automation hardware and factory automation software.

      The equipment automation segment provides modules and systems for use within semiconductor process equipment. These products automate the movement of wafers into and out of semiconductor manufacturing process chambers and provide an integration point between factory automation systems and process tools. These offerings include vacuum and atmospheric modules and systems, such as robots, load ports and equipment front end modules. Also included is the assembly and manufacturing of customer designed automation systems (“contract automation systems”). The primary customers for these products are manufacturers of process tool equipment.

      The factory automation hardware segment provides automated material handling products and components for use within the factory. The Company’s factory automation hardware products consist of automated storage and retrieval systems and wafer/reticle transport systems such as overhead monorail systems and overhead hoist vehicles. These products store, transport and manage the movement of work-in-process wafers and lithography reticles throughout the fab. The factory automation hardware segment includes mini-environments and other automated transfer mechanisms to isolate the semiconductor wafer from the production environment.

      The factory automation software segment provides software products for the “real time enterprise” meeting the requirements for lean manufacturing, supply chain execution, closed loop automation and enterprise process management. The Company’s software products enable manufacturers to increase their return on investment by maximizing production efficiency, and may be sold either as part of an integrated solution or on a stand-alone basis.

      The Company’s other segment currently consists of the Specialty Equipment and Life Sciences division (“SELS”), which provides standard and custom automation technology and products for the semiconductor, photonics, life sciences and certain other industries.

      The Company evaluates performance and allocates resources based on revenues and operating income (loss). Operating income (loss) for each segment includes selling, general and administrative expenses directly attributable to the segment. Amortization of acquired intangible assets, including impairment of these assets and of goodwill and acquisition-related and restructuring charges, are excluded from the segments’ operating income (loss). The Company’s non-allocable overhead costs, which include corporate general and administrative expenses, are allocated between the segments based upon segment revenues. Segment assets exclude intangible assets, goodwill, and the Company’s investments in cash equivalents and marketable securities.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — Continued

     Financial information for the Company’s business segments is as follows (in thousands):

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — Continued

      A reconciliation of the Company’s reportable segment operating income (loss) to the corresponding consolidated amounts for the three and nine month periods ended June 30, 2004 and 2003 is as follows (in thousands):

      A reconciliation of the Company’s reportable segment assets to the corresponding consolidated amounts as of June 30, 2004 and September 30, 2003 is as follows (in thousands):

      Net revenues based upon the source of the customer order by geographic area are as follows (in thousands):

      The Company had no customer that accounted for more than 10% of revenues in the three or nine months ended June 30, 2004 and 2003.

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BROOKS AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — Continued

8.

Restructuring and Acquisition-Related Liabilities

      The Company’s business is significantly dependent on capital expenditures by semiconductor manufacturers and original equipment manufactures, or “OEM’s”, that are, in turn, dependent on the current and anticipated market demand for semiconductors. Demand for semiconductors is cyclical and has historically experienced periodic downturns. The semiconductor industry had experienced such a downturn that extended from 2001 well into 2003. The downturn affected revenues, gross margins and operating results. In response to this downturn, the Company implemented cost reduction programs aimed at aligning its ongoing operating costs with its currently expected revenues over the near term. These cost management initiatives included consolidating facilities, reductions to headcount, salary and wage reductions and reduced spending. The Company believes that the cost reduction programs implemented have aligned costs with revenues. In the event that the Company is unable to sustain this alignment, additional cost cutting programs may be required in the future. The Company routinely assesses the risk and liability related to leased facilities abandoned in previous restructuring charges.

      Based on its continued efforts to align costs with revenues, the Company took additional restructuring actions in the three months ended June 30, 2004. Accordingly, $0.9 million of restructuring charges were recorded in the three months ended June 30, 2004, consisting of $0.5 million for workforce reductions of approximately 10 employees and $0.4 million related to excess facilities, of which $0.3 million relates to leaseholds and communications equipment abandoned in a facility relocation and $0.1 million of which represents the final exit costs for a previously abandoned facility. In the nine months ended June 30, 2004, the Company recorded restructuring charges of $3.1 million, consisting of $2.0 million related to workforce reductions and $1.1 million related to previously abandoned facilities.

      In the three months ended June 30, 2003, the Company recorded restructuring and acquisition related charges of $20.7 million, consisting of workforce reductions of $6.9 million, $10.1 million related to certain lease obligations related to facilities abandoned in a previous restructuring and $3.7 million loss and associated legal costs on the disposition of the Brooks Switzerland subsidiary. In the nine months ended June 30, 2003, the Company recorded restructuring and acquisition related charges totaling $46.6 million, consisting of $24.5 million related to workforce reductions, $11.4 million related to the consolidation of several of the our facilities, $6.1 million of capitalized costs related to cancelled systems, $2.0 million comprised of legal, relocation and consulting costs to integrate its PRI acquisition and $3.7 million relates to the loss and associated legal costs on the disposition of the Brooks Switzerland subsidiary, offset by $1.1 million of excess accruals reversed.

      The activity for the three and nine months ended June 30, 2004 and 2003 related to the Company’s restructuring accruals is summarized below (in thousands):

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BROOKS AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — Continued

      The Company expects the majority of the remaining severance costs of $1.5 million will be paid within six months. The expected remaining facilities costs, totaling $19.2 million, net of estimated sub-rental income, will be paid on a regular basis on leases that expire through September 2011.

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BROOKS AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — Continued

9.

Other Balance Sheet Information

      Components of other selected captions in the Consolidated Balance Sheets are as follows (in thousands):

      The Company provides for the estimated cost of product warranties at the time product revenue is recognized and for retrofit accruals at the time retrofit programs are established. While the Company engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of its component supplies, the Company’s warranty obligation is affected by product failure rates, utilization levels, material usage, service delivery costs incurred in correcting a product failure, and supplier warranties on parts delivered to the Company. Should actual product failure rates, utilization levels, material usage, service delivery costs or supplier warranties on parts differ from the Company’s estimates, revisions to the estimated warranty and retrofit liability would be required. Product warranty and retrofit activity for the three and nine months ended June 30, 2004 and 2003 is as follows (in thousands):

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BROOKS AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — Continued

10.

Contingencies

      In connection with the acquisition of the e-Diagnostics product business in June 2001, the Company could be required to make additional cash payments under certain conditions. If the Company elected to settle any or all potential contingent payments in cash, additional cash payments aggregating a maximum of $8.0 million over the next two years could be required for payment of consideration contingent upon meeting certain performance objectives. The Company is currently in negotiations concerning resolution of this contingency in a manner that will not be financially adverse to either party.

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

      Certain statements in this Quarterly Report on Form 10-Q constitute “forward-looking statements”. These forward-looking statements involve known risks, uncertainties and other factors which may cause the actual results, our performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Examples of these forward-looking statements include the current trend of increased customer demand for our products discussed below. Such factors include the “Factors That May Affect Future Results” set forth in Management’s Discussion and Analysis of Financial Condition and Results of Operations, which is included in this report. Precautionary statements made herein should be read as being applicable to all related forward-looking statements wherever they appear in this report.

Overview

      We are a leading supplier of automation products and solutions primarily serving the worldwide semiconductor market. We supply hardware, software and services to both chip manufacturers and original equipment manufacturers, or OEMs, who make process equipment for semiconductor manufacturing. Our offerings range from hardware and software modules to fully integrated systems and services. Although our core business addresses the increasingly complex automation requirements of the global semiconductor industry, we are also focused on providing automation solutions for a number of related industries, including flat panel display manufacturing, data storage, aerospace and defense, automotive, and medical devices.

      We operate in three major segments: equipment automation, factory automation hardware and factory automation software. Equipment or tool automation consists of hardware and software used on or within process tools to move individual wafers in and out of a tool. Factory automation hardware consists of equipment used inside the fab, but external to a process tool, to automate the handling of batches of wafers or other material throughout the production floor, as well as specialized tools for automatically sorting, storing and inspecting material. Factory automation software is used within a factory in computer integrated manufacturing for controlling and managing production and resources in a fab. We sell our products and services to nearly every major semiconductor chip manufacturer and OEM in the world, including all of the top ten chip companies and nine of the top ten equipment companies. In May 2004, we entered into and announced a subcontracting agreement pursuant to which some on-site support services and spare parts management for previously installed factory automation hardware products is provided by a third party.

      Traditionally, our foreign revenues have been generally denominated in United States dollars. Accordingly, foreign currency fluctuations have not had a significant impact on the comparison of the results of operations for the periods presented. The costs and expenses of our international subsidiaries are generally denominated in currencies other than the United States dollar. However, since the functional currency of our international subsidiaries is the local currency, foreign currency translation adjustments are reflected as “Accumulated other comprehensive income (loss),” which is a component of stockholders’ equity. As certain of our manufacturing costs are denominated in foreign currency, weakness in the United States dollar can generate margin pressure. To the extent that we expand our international operations or change our pricing practices to denominate prices in foreign currencies, we will be exposed to increased risk of currency fluctuation.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS — Continued

      In view of the current market conditions we are currently facing and the cyclical nature of the semiconductor capital equipment industry, we are focusing our major efforts in the following areas:

	•		Sustaining our ability to fulfill our customers’ requirements in light of increases during this fiscal year in customer demand while at the same time maintaining expense control and limiting increases to our cost structure;
	•		Improving our product quality and on time delivery in order to fulfill our customers’ requirements;
	•		Obtaining necessary components and materials from our suppliers in required quantities and of required quality as demand for our products fluctuates;
	•		Implementing flexible procurement and manufacturing processes designed to help to sustain profitability in then event of reductions in demand;
	•		Optimizing working capital;
	•		Controlling and managing costs;
	•		Aligning costs and revenues to sustain profitable levels of operation, including positive operating cash flow;
	•		Developing the products and services required for future success in the market;
	•		Greater expansion into other industries such as flat panel display manufacturing, aerospace and defense, automotive, and medical devices;
	•		Greater expansion of software development capabilities in countries outside of the United States, specifically including India;
	•		Examing how best to improve customer sales and our support structure in Japan;
	•		Evaluating our strategic direction and value of non-core products; and
	•		Improving the efficiency of our internal information and business systems, which could result in the upgrade or replacement of certain applications.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS — Continued

Three and Nine Months Ended June 30, 2004, Compared to Three and Nine Months Ended June 30, 2003

      Revenues

      We reported revenues of $155.2 million in the three months ended June 30, 2004, compared to $84.0 million in the same prior year period. Our revenues for the nine months ended June 30, 2004 were $375.8 million, compared to $261.9 million in the same prior year period. These increases are consistent and reflective of current industry trends of increased demand for semiconductor capital equipment. The current trend of increased customer demand for our hardware products however may not be indicative of future results.

      Our equipment automation segment reported revenues of $96.0 million in the three months ended June 30, 2004, an increase of 147.2% from revenues of $38.8 million in the same prior year period. Equipment automation segment revenues for the nine months ended June 30, 2004 were $220.4 million, an increase of $91.9 million from the comparable prior year period. The increases for both the three and nine month periods are attributable to increased shipments to our OEM customer base as demand for products from these customers has increased due to a higher demand for semiconductor capital equipment. We experienced improved order volume for our equipment automation hardware products reflective of current industry trends of increased demand for semiconductor capital equipment. We expect near term revenues for our equipment automation segment to remain essentially flat with current levels. Our factory automation hardware segment reported revenues of $33.4 million in the three months ended June 30, 2004, an increase of 55.5% from revenues of $21.5 million in the same prior year period. Factory automation hardware segment revenues for the nine months ended June 30, 2004 were $68.5 million, an increase of $2.3 million from the comparable prior year period. The increase for the three month period ended June 30, 2004 over the same prior year period is primarily the result of completion and recognition of revenue from ongoing factory automation hardware projects engaged over the last twelve months. The slight increase for the nine month period ended June 30, 2004 over the same prior year period is primarily attributable to an increase in demand in the current period. We experienced improved order volume for our factory automation hardware products reflective of current industry trends of increased demand for semiconductor capital equipment. Our factory automation software segment reported revenues of $24.4 million in the three months ended June 30, 2004, an increase of $2.0 million from revenues of $22.4 million in the same prior year period. We expect factory automation software revenues to remain essentially flat in the near term compared to the current quarter’s revenue levels. Factory automation software segment revenues for the nine months ended June 30, 2004 were $83.9 million, an increase of 30.3% from the comparable prior year period. The increases for the nine month period ended June 30, 2004 is attributable to the completion and acceptance by the customer of a major European software project for approximately $17.3 million in the second quarter of fiscal 2004.

      Product revenues increased to $124.5 million in the three months ended June 30, 2004, compared to $53.8 million in the three months ended June 30, 2003. Product revenues in the nine months ended June 30, 2004 were $275.7 million, an increase of $101.1 million from the $174.6 million in the prior year. The increase for both the three and nine month periods is primarily attributable to increased OEM product shipments from our equipment automation segment.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS — Continued

      Services revenues for the three months ended June 30, 2004 were $30.7 million, a slight increase from the three months ended June 30, 2003. Services revenues for the nine months ended June 30, 2004 were $100.1 million, an increase of $12.8 million over the $87.3 million in the prior year period. The increase for the nine month period is primarily attributable to the completion and acceptance by the customer of a major project for our factory automation software segment in the second quarter of the current year period offset by slightly lower services business volume.

      Foreign revenues were $68.4 million, or 44.1% of revenues, and $178.8 million, or 47.6% of revenues, in the three and nine months ended June 30, 2004, respectively. Foreign revenues in the three and nine months ended June 30, 2003 were $45.6 million, or 54.3% of revenues, and $133.0 million, or 50.8% of revenues, respectively. We expect that foreign revenues will continue to account for a significant portion of total revenues. Our increased revenue volume from the equipment automation segment is predominantly to United States based equipment suppliers.

      Deferred revenues of $38.7 million at June 30, 2004 consisted of $8.8 million related to deferred maintenance contracts and $29.9 million related to revenues deferred for acceptance based and completed contract method arrangements. Deferred revenues of $33.7 million at September 30, 2003 consisted of $6.6 million related to deferred maintenance contracts and $27.1 million related to revenues deferred for acceptance based and completed contract method arrangements. We expect our deferred revenue balance to decrease in the next six months with the anticipated completion and acceptance of certain significant projects.

      Gross Margin

      Gross margin increased to 37.3% for the three months ended June 30, 2004, compared to 32.8% for the same prior year period. Gross margin increased to 37.0% for the nine months ended June 30, 2004, compared to 29.3% in the comparable prior year period. The increase for both the three and nine month periods is primarily attributable to our plant consolidation and other cost reduction measures as well as a more favorable mix of OEM products which traditionally have higher gross margins. This increase was offset slightly by our contract automation systems revenue, which has lower gross margins than our typical business. Our gross margin increased sequentially to 37.3% from 36.9% in the second fiscal quarter of 2004. Our equipment automation segment’s gross margin increased to 33.8% and 33.9%, respectively, in the three and nine months ended June 30, 2004, from 24.2% and 21.2%, respectively, in the three and nine months ended June 30, 2003. The increase is primarily attributable to our plant consolidation and other cost reduction measures along with increased volumes resulting in more favorable absorption of fixed costs related to this segment offset by contract automation systems revenues which have lower gross margins. Gross margin for our factory automation hardware segment increased to 25.1% in the three months ended June 30, 2004 from 13.8% in the prior year period. The increase is primarily the result of an increase in the sales volume for our factory automation hardware products resulting in increased absorption of our fixed costs related to this segment. Gross margin for our factory automation hardware segment increased to 25.8% in the nine months ended June 30, 2004 from 18.9% in the prior year comparable period. This increase is attributable primarily to the increased fixed cost absorption in the current year period as well as the absence of the impact of low margin projects, which were completed in the prior year period. Our factory automation software segment’s gross margin for the three months ended June 30, 2004 increased slightly to 67.4% compared to 66.6% in the same prior year period. The increase is primarily the result of additional product mix of license revenues, which yield higher gross margins in the current year period. Gross margin for our factory automation software segment decreased to 54.5% in the nine months ended June 30, 2004 from 56.6% in the prior year comparable period. The change is primarily due to the impact of lower gross margins realized on the $17.3 million of software project revenue recognized upon completion and acceptance by the customer in the second quarter of fiscal 2004 offset by the impact our cost reduction measures.

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BROOKS AUTOMATION, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS — Continued

      Gross margin on product revenues was 34.7% for the three months ended June 30, 2004, an increase from 21.4% in the same prior year period. Gross margin on product revenues was 36.1% for the nine months ended June 30, 2004 compared to 25.0% in the comparable prior year period. The increase in gross margin for both the three and nine month periods is primarily attributable to the impact of our cost reduction measures and a more favorable mix of OEM products which have higher gross margins.

      Gross margin on service revenues was 47.6% for the three months ended June 30, 2004, a decrease from 53.3% for the three months ended June 30, 2003. Gross margin on service revenue was 39.5% for the nine months ended June 30, 2004, an increase from 37.7% in the comparable prior year period. The decrease in the three months ended June 30, 2004 is primarily the result of lower gross margins realized as a result of the service revenues mix partially offset by the positive impact of our cost reduction measures. The increase for the nine months ended June 30, 2004 is primarily a result of the positive impact of our cost reduction measures offset by the lower margin realized on the above mentioned factory automation software project.

      Research and Development

      Research and development expenses for the three months ended June 30, 2004 were $16.8 million, a decrease of $1.3 million, compared to $18.1 million in the three months ended June 30, 2003. Research and development expenses for the nine months ended June 30, 2004 were $49.5 million, a decrease of $8.0 million, compared to $57.5 million in the nine months ended June 30, 2003. The decrease in spending for the three and nine month periods ending June 30, 2004 is primarily the result of our cost reduction actions. We plan to continue to invest in research and development to enhance existing products and develop new tool and factory hardware and software automation solutions for the semiconductor, data storage and flat panel display manufacturing industries. We expect to focus our efforts on those research and development projects that are most consistent with our business realignment.

      Selling, General and Administrative

      Selling, general and administrative expenses were $22.8 million for the three months ended June 30, 2004, an increase of $1.1 million, compared to $21.7 million in the same prior year period. Included in the three months ended June 30, 2004 was $2.6 million of additional charges for variable cash compensation plans offset by the reversal of excess bad debt reserves of $0.5 million as collections of overdue receivables have improved . Selling, general and administrative expenses were $64.0 million for the nine months ended June 30, 2004, a decrease of $14.8 million, compared to $78.8 million in the same prior year period. Selling, general and administrative expenses also decreased as a percentage of revenues in the three and nine months ended June 30, 2004, to 14.7% and 17.0%, respectively, from 25.8% and 30.1%, respectively, in the comparable prior year periods. The decrease in these expenditures as a percentage of revenues for the three and nine months ended June 30, 2004, is attributable to our cost containment and reduction initiatives, coupled with higher revenue levels against which these costs were measured. In addition, for the nine months ended June 30, 2003 $7.3 million of accelerated depreciation associated with our restructuring plans for facilities consolidation and $3.4 million of other charges, primarily deferred compensation costs related to stock options granted to employees of acquired companies, were recorded to selling, general and administrative expenses. We expect that selling, general and administrative expense in subsequent periods will grow slightly from the current existing levels due to higher expenses for cash variable compensation plans that we have established.

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BROOKS AUTOMATION, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS — Continued

      Amortization of Acquired Intangible Assets

      Amortization expense for acquired intangible assets totaled $0.9 million and $2.8 million in the three and nine months ended June 30, 2004, respectively, compared to $0.9 million and $3.9 million in the three and nine months ended June 30, 2003, respectively. The reduction in amortization of acquired intangible assets in the nine month period is primarily attributable to certain assets reaching the end of their useful lives as well as the impairment charge recorded against intangible assets which reduced the carrying value and on-going amortization.

      Restructuring and Acquisition-related Charges

      Restructuring and acquisition-related charges decreased by $19.9 million in the three months ended June 30, 2004 compared to the same prior year period. In the three months ended June 30, 2004, we recorded restructuring charges of $0.9 million, consisting of $0.5 million related to workforce reductions and $0.4 million related to previously abandoned facilities. In the nine months ended June 30, 2004, we recorded restructuring charges of $3.1 million, consisting of $2.0 million related to workforce reductions and $1.1 million related to previously abandoned facilities. The workforce reduction charge related to our ongoing efforts to realign costs with revenues. In the three months ended June 30, 2003, we recorded restructuring and acquisition related charges of $20.7 million, consisting of workforce reductions of $6.9 million, $10.1 million related to certain lease obligations related to facilities abandoned in a previous restructuring, and $3.7 million for the loss and associated legal costs on the disposition of the Brooks Switzerland subsidiary. In the nine months ended June 30, 2003, we recorded restructuring and acquisition related charges totaling $46.6 million, consisting of $24.5 million related to workforce reductions, $11.4 million related to the consolidation of several of the our facilities, $6.1 million of capitalized costs related to cancelled systems, $2.0 million comprised of legal, relocation and consulting costs to integrate our PRI acquisition and $3.7 million for the loss and associated legal costs on the disposition of the Brooks Switzerland subsidiary, offset by the $1.1 million of excess accruals reversed. We continue to evaluate measures in which to consolidate operations and reduce costs, which may result in charges in future periods. We routinely assess the risk and liability related to leased facilities abandoned in previous restructuring charges.

      Interest Income and Expense

      Interest income increased by $0.4 million, to $1.2 million, in the three months ended June 30, 2004, compared to the same prior year period, primarily as a result of higher balances available for investment offset by lower interest rates. Interest income decreased slightly by $0.2 million, to $3.5 million, in the nine months ended June 30, 2004 compared to the same prior year period, primarily as a result of lower interest rates. Interest expense of $2.4 million and $7.1 million for the three and nine months ended June 30, 2004, respectively, and $2.6 million and $7.8 million for the three and nine months ended June 30, 2003, respectively, is primarily attributable to interest on our Convertible Subordinated Notes.

      Other (Income) Expense

      Other expense of $0.3 million in the three months ended June 30, 2004 primarily represents realized losses on foreign currency transactions during the period. Other expense of $0.5 million in the nine months ended June 30, 2004 primarily represents settlement of an arbitration proceeding in Israel of $0.7 million offset by realized gains on foreign currency transactions during the periods reported. Other expense of $0.8 million in the three months ended June 30, 2003 was primarily the result of realized loses on foreign currency transactions during the period. Other expense of $16.8 million in the nine months ended June 30, 2003 was primarily the result the $3.0 million net loss realized on the sale of our investment in Shinsung common shares in March 2003, the impairment of $11.5 million on our investment in Shinsung warrants, and $2.3 million of realized loses on foreign currency transactions during the periods reported.

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BROOKS AUTOMATION, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS — Continued

      Income Tax Provision

      We recorded an income tax provision of $2.7 million and $5.6 million in the three and nine months ended June 30, 2004, respectively, compared to an income tax provision of $16,000 and $4.9 million in the same prior year periods, respectively. The tax provision for all periods presented is attributable to foreign income and withholding taxes. We continue to provide a full valuation allowance for our deferred tax assets at June 30, 2004, as we believe it is more likely than not that future net tax benefits from accumulated net operating losses and deferred taxes will not be realized.

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BROOKS AUTOMATION, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS — Continued

      Liquidity and Capital Resources

      At June 30, 2004, we had cash, cash equivalents and marketable securities aggregating $321.4 million. This amount was comprised of $194.6 million of cash and cash equivalents, $41.9 million of investments in short-term marketable securities and $84.9 million of investments in long-term marketable securities. This compares to $198.6 million of cash, cash equivalents and marketable securities at September 30, 2003, an increase of $122.8 million. The increase in cash is principally due to the proceeds of $124.3 million from our common stock offering.

      Cash and cash equivalents were $194.6 million at June 30, 2004, an increase of $69.6 million from September 30, 2003. This increase in cash and cash equivalents is primarily due to cash provided from the issuance of common stock and exercise of common stock options of $128.6 million, offset by cash used in operations of $1.8 million, capital expenditures of $3.8 million, and net purchases of marketable securities of $53.7 million.

      Cash used in operations was $1.8 million for the nine months ended June 30, 2004, and is primarily attributable to increases in our receivables balances of $31.8 million caused by our increased revenue levels and increased inventory levels of $27.9 million caused by the current business ramp offset by increased accounts payable levels of $16.0 million, non-cash depreciation and amortization of $13.0 million and positive operating results of $9.7 million. Utilization of cash for working capital was additionally offset by the improving financial results as we continue to achieve profitability.

      Cash used in investing activities was $57.5 million for the nine months ended June 30, 2004 and is principally comprised of net purchases of marketable securities aggregating $53.7 million and $3.8 million of capital additions.

      Cash provided by financing activities for the nine months ended June 30, 2004, was comprised of $128.6 million of proceeds from our common stock offering and from the exercise of options to purchase our common stock offset by $0.1 million for the payment of long-term debt.

           On May 23, 2001, we completed the private placement of $175.0 million aggregate principal amount of 4.75% Convertible Subordinated Notes due in 2008. Interest on the notes is paid on June 1 and December 1 of each year. The notes will mature on June 1, 2008. We may redeem the notes at stated premiums as of June 6, 2004. Holders may require us to repurchase the notes upon a change in control in certain circumstances. The notes are convertible at any time prior to maturity, at the option of the holders, into shares of our common stock, at a conversion price of $70.23 per share, subject to certain adjustments. The notes are subordinated to our senior indebtedness and structurally subordinated to all indebtedness and other liabilities of our subsidiaries.

      While we have no significant capital commitments, as we expand our product offerings, we anticipate that we will continue to make capital expenditures to support our business and improve our computer systems infrastructure.

      At June 30, 2004, we had approximately $0.5 million of an uncommitted demand promissory note facility still in use, all of it for letters of credit.

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BROOKS AUTOMATION, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS — Continued

      We believe that our existing resources will be adequate to fund our working capital and capital expenditure requirements for both our short and long term plans. However, the cyclical nature of the semiconductor industry makes it difficult for us to predict future liquidity requirements with certainty.

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BROOKS AUTOMATION, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS — Continued

Recently Enacted Accounting Pronouncements

      In January 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities” (“FIN 46R”), which clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements”, to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support and replaces FASB Interpretation No. 46. FIN 46R provides guidance on the identification of entities for which control is achieved through means other than through voting rights (“variable interest entities” or “VIEs”) and how to determine when and which business enterprise should consolidate the VIE. In addition, FIN 46R requires that both the primary beneficiary and all other enterprises with a significant variable interest in a VIE make additional disclosures. This interpretation was effective in financial statements of public entities that have interests in variable interest entities or potential variable interest entities commonly referred to as special-purpose entities for periods ending after December 15, 2003. Application of this pronouncement by public entities for all other types of entities, subject to FIN 46R, is required in financial statements for periods ending after March 15, 2004. The adoption of FIN 46R did not have an impact on our financial position or results of operations.

      In December 2003, the Staff of the Securities and Exchange Commission issued Staff Accounting Bulletin No. 104 (“SAB 104”), “Revenue Recognition”, which supersedes SAB 101, “Revenue Recognition in Financial Statements”. The primary purpose of SAB 104 is to rescind accounting guidance contained in SAB 101 related to multiple element revenue arrangements, superseded as a result of the issuance of EITF 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables.” Additionally, SAB 104 rescinds the SEC’s “Revenue Recognition in Financial Statements Frequently Asked Questions and Answers” (the “FAQ”) issued with SAB 101 that had been codified in SEC Topic 13, “Revenue Recognition”. Selected portions of the FAQ have been incorporated into SAB 104. While the wording of SAB 104 has changed to reflect the issuance of EITF 00-21, the revenue recognition principles of SAB 101 remain largely unchanged by the issuance of SAB 104. The adoption of SAB 104 had no impact on our financial position or results of operations.

Factors That May Affect Future Results

      You should carefully consider the risks described below and the other information in this report before deciding to invest in shares of our common stock. These are the risks and uncertainties we believe are most important for you to consider. Additional risks and uncertainties not presently known to us, which we currently deem immaterial or which are similar to those faced by other companies in our industry or business in general, may also impair our business operations. If any of the following risks or uncertainties actually occur, our business, financial condition and operating results would likely suffer. In that event, the market price of our common stock could decline and you could lose all or part of your investment.

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BROOKS AUTOMATION, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS — Continued

Risks Relating to Our Industry

Due in part to the cyclical nature of the semiconductor manufacturing industry, we have recently incurred substantial operating losses and may have future losses.

      Our business is largely dependent on the semiconductor manufacturing industry and other businesses employing similar manufacturing technology. In recent years, these businesses have experienced unpredictable and volatile business cycles due in large part to rapid changes in demand and manufacturing capacity for semiconductors. The semiconductor industry experienced a prolonged downturn, which negatively impacted us since the third quarter of fiscal 2001 until the quarter ended December 31, 2003. As a result of the downturn, our OEM and end-user customers significantly reduced the rate at which they purchased our products and services. This reduced demand adversely affected our sales volume and gross margins and resulted in substantial operating losses during fiscal 2001, 2002 and 2003. These losses were due to, among other things, writedowns for obsolete inventory and expenses related to investments in research and development and global service and support necessary to maintain our competitive position. Should there be another downturn of similar or even lesser proportions, we could well experience further operating losses.

The cyclical nature of the semiconductor industry also presents risks in the event of a sustained market upturn.

      In recent quarters, spending in the semiconductor capital equipment industry has increased, with a resulting increase in the demand for our products and services. As a result of this upturn we may have insufficient inventory and manufacturing capacity to meet our customer needs on a timely basis, which could result in customer dissatisfaction, the loss of customers and various other expenses that could reduce gross margins and profitability. It is also not possible to predict the duration of any increase in the demand for our products and services. There can be no assurance that this current trend will continue.

Risks Relating to Brooks

Our operating results could fluctuate significantly, which could negatively impact our business.

      Our revenues, operating margins and other operating results could fluctuate significantly from quarter to quarter depending upon a variety of factors, including:

	•		demand for our products as a result of the cyclical nature of the semiconductor manufacturing industry or otherwise;
	•		changes in the timing and terms of product orders by our customers as a result of our customer concentration or otherwise;
	•		changes in the mix of products and services that we offer;
	•		timing and market acceptance of our new product introductions;
	•		delays or problems in the planned introduction of new products;
	•		our competitors’ announcements of new products, services or technological innovations, which can, among other things, render our products less competitive due to the rapid technological change in our industry;
	•		the timing and related costs of any acquisitions or dispositions;
	•		the success of collaborative programs by which other companies may provide service to our products located at customer sites;
	•		our ability to reduce our costs due to decreased demand for our products and services;
	•		disruptions in our manufacturing process or in the supply of components to us;

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BROOKS AUTOMATION, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS — Continued

	•		write-offs for excess or obsolete inventory; and
	•		competitive pricing pressures.

      As a result of these risks, we believe that quarter to quarter comparisons of our revenue and operating results may not be meaningful, and that these comparisons may not be an accurate indicator of our future performance. If our quarterly results fluctuate significantly, our business could be harmed.

Our restructuring activities and cost reduction measures may have materially harmed our business.

      Primarily in response to reduced demand for our products, during the recent downturn in the semiconductor industry we implemented cost reductions and other restructuring activities throughout our organization. These cost saving measures included several reductions in workforce, salary and wage reductions, reduced inventory levels, consolidation of our manufacturing facilities to our Chelmsford, Massachusetts facilities and the discontinuation of certain product lines and information technology projects. Our restructuring activities may have harmed us because they may have resulted in reduced productivity by our employees and increased difficulty in retaining and hiring a sufficient number of qualified employees familiar with our products and processes and the locales in which we operate.

Delays and technical difficulties in our products and operations may result in lost revenue, lost profit, delayed or limited market acceptance or product liability claims.

      As the technology in our systems and manufacturing operations has become more complex and customized, it has become increasingly difficult to design and integrate these technologies into our newly-introduced systems, procure adequate supplies of specialized components, train technical and manufacturing personnel and make timely transitions to volume manufacturing. Due to the complexity of our manufacturing processes, we have on occasion failed to meet our customers’ delivery or performance criteria, and as a result we have deferred revenue recognition, incurred late delivery penalties and had higher warranty and service costs. We cannot guarantee that we will not experience these problems in the future. We may be unable to recover expenses we incur due to changes or cancellations of customized orders. There are also substantial unanticipated costs associated with ensuring that new products function properly and reliably in the early stages of their life cycle. These costs have been and could in the future be greater than expected as a result of these complexities. Our failure to control these costs could materially harm our business and profitability.

      Because many of our customers use our products for business-critical applications, any errors, defects or other performance or technical problems could result in financial or other damage to our customers and could significantly impair their operations. Our customers could seek to recover damages from us for losses related to any of these issues. A product liability claim brought against us, even if not successful, would likely be time-consuming and costly to defend and could adversely affect our marketing efforts.

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BROOKS AUTOMATION, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS — Continued

If we do not continue to introduce new products and services that reflect advances in technology in a timely manner, our products and services will become obsolete and our operating results will suffer.

      Our success is dependent on our ability to respond to the rapid rate of technological change present in the semiconductor manufacturing industry. The success of our product introduction and development depends on our ability to:

	•		accurately identify and define new market opportunities and products;
	•		obtain market acceptance of our products, such as OneFab AMHS;
	•		timely innovate, develop and commercialize new technologies and applications;
	•		adjust to changing market conditions;
	•		differentiate our offerings from our competitors’ offerings;
	•		continue to develop a comprehensive, integrated product and service strategy; and
	•		properly price our products and services.

      If we cannot succeed in responding in a timely manner to technological and/or market changes, we could lose our competitive position which could materially harm our business and our prospects.

Our systems integration services business has grown significantly, and poor execution of that business could adversely affect our operating results.

      The number of projects for our systems integration services business, which integrates our software and hardware products with products provided by our customers or others, has grown significantly. We are in the early stages of developing this business. Accordingly, we are subject to the risks attendant to entering a business in which we have little direct experience. Due to complexities in this business, we may be unable to integrate our customers’ products with our software and hardware products in a cost effective and timely manner, which could adversely affect our operating results and materially harm our business. Our ability to succeed in this business and increase our revenues is further limited by our ability to retain, hire and train systems integration personnel. We believe that there is significant competition for personnel with the advanced skills and technical knowledge that this business requires. Since some of our competitors may have greater resources to hire personnel with those skills and knowledge, our operating margins could be adversely affected if we cannot hire and train additional personnel or deliver integrated systems to our customers on a timely basis consistent with our budgets.

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BROOKS AUTOMATION, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS — Continued

The global nature of our business exposes us to multiple risks.

      For the quarter ended June 30, 2004, approximately 44% of our revenues were derived from sales outside North America. We expect that international sales, including increased sales in Asia, will continue to account for a significant portion of our revenues. As a result of our international operations, we are exposed to many risks and uncertainties, including:

	•		difficulties in staffing, managing and supporting operations in multiple countries;
	•		longer sales-cycles and time to collection;
	•		tariff and international trade barriers;
	•		fewer legal protections for intellectual property and contract rights abroad;
	•		different and changing legal and regulatory requirements in the jurisdictions in which we operate;
	•		government currency control and restrictions on repatriation of earnings;
	•		fluctuations in foreign currency exchange and interest rates; and
	•		political and economic changes, hostilities and other disruptions in regions where we operate.

      Negative developments in any of these areas in one or more countries could result in a reduction in demand for our products, the cancellation or delay of orders already placed, threats to our intellectual property, difficulty in collecting receivables, and a higher cost of doing business, any of which could materially harm our business and profitability.

Our business could be materially harmed if we fail to adequately integrate the operations of the businesses that we may acquire.

      We have made in the past, and may make in the future, acquisitions or significant investments in businesses with complementary products, services and/or technologies. Our acquisitions present numerous risks, including:

	•		difficulties in integrating the operations, technologies, products and personnel of the acquired companies and realizing upon the anticipated synergies of the combined businesses;
	•		defining and executing a comprehensive product strategy;
	•		managing the risks of entering markets or types of businesses in which we have limited or no direct experience;
	•		the potential loss of key employees, customers and strategic partners of acquired companies;
	•		unanticipated problems or latent liabilities, such as problems with the quality of the installed base of the target company’s products;
	•		problems associated with compliance with the target company’s existing contracts;
	•		difficulties in managing geographically dispersed operations; and
	•		the diversion of management’s attention from normal daily operations of the business.

      If we acquire a new business, we may be required to expend significant funds, incur additional debt or issue additional securities, which may negatively affect our operations and be dilutive to our stockholders. In periods following an acquisition, we will be required to evaluate goodwill and acquisition-related intangible assets for impairment. When such assets are found to be impaired, they will be written down to estimated fair value, with a charge against earnings. For example, we were required to record impairment charges on acquired intangible assets and goodwill aggregating $479.3 million in fiscal 2002. The failure to adequately address these risks could materially harm our business and financial results.

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BROOKS AUTOMATION, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS — Continued

Risks Relating to Our Customers

We face substantial competition which may lead to price pressure and otherwise adversely affect our sales.

      We face substantial competition throughout the world in each of our product areas. Our primary competitors range from large companies such as Asyst/Shinko, Daifuku, HP/Compaq, IBM, Murata, Rorze, TDK and Yaskawa to smaller, regional companies. We also compete with OEM manufacturers, such as Applied Materials, that satisfy their semiconductor and flat panel display handling needs internally rather than by purchasing systems or modules from a supplier like us. Some of our competitors have substantially greater financial resources and more extensive engineering, manufacturing, marketing and customer support capabilities than we do. We expect our competitors to continue to improve the performance of their current products and to introduce new products and technologies that could adversely affect sales of our current and future products and services. New products and technologies developed by our competitors or more efficient production of their products could require us to make significant price reductions to avoid losing orders. If we fail to respond adequately to pricing pressures or fail to develop products with improved performance or developments with respect to the other factors on which we compete, we could lose customers or orders. If we are unable to compete effectively, our business and prospects could be materially harmed.

Because we rely on a limited number of customers for a large portion of our revenues, the loss of one or more of these customers could materially harm our business.

      We receive a significant portion of our revenues in each fiscal period from a relatively limited number of customers, and that trend is likely to continue. Sales to our ten largest customers accounted for approximately 37% of our total revenues in fiscal 2003, 33% in fiscal 2002 and 37% in fiscal 2001. As the semiconductor manufacturing industry continues to consolidate and further shifts to foundries which manufacture semiconductors designed by others, the number of our potential customers could decrease, which would increase our dependence on our limited number of customers. The loss of one or more of these major customers or a decrease in orders from one of these customers could materially affect our revenue, business and reputation.

Because of the lengthy sales cycles of many of our products, we may incur significant expenses before we generate any revenues related to those products.

      Our customers may need several months to test and evaluate our products. This increases the possibility that a customer may decide to cancel or change plans, which could reduce or eliminate our sales to that customer. As a result of this lengthy sales cycle, we may incur significant research and development expenses, and selling, general and administrative expenses before we generate the related revenues for these products, and we may never generate the anticipated revenues if our customer cancels or changes its plans.

      In addition, many of our products will not be sold directly to the end-user but will be components of other products. As a result, we rely on OEMs of our products to select our products from among alternative offerings to be incorporated into their equipment at the design stage; so-called design ins. The OEM’s decisions often precede the generation of volume sales, if any, by a year or more. Moreover, if we are unable to achieve these design ins from OEMs, we would have difficulty selling our products to that OEM because changing suppliers involves significant cost, time, effort and risk on the part of that OEM.

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BROOKS AUTOMATION, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS — Continued

Customers do not make long term commitments to purchase our products and our customers may cease purchasing our products at any time.

      Sales of our products are often made pursuant to individual purchase orders and not under long-term commitments and contracts. Our customers frequently do not provide any assurance of minimum or future sales and are not prohibited from purchasing products from our competitors at any time. Accordingly, we are exposed to competitive pricing pressures on each order. Our customers also engage in the practice of purchasing products from more than one manufacturer to avoid dependence on sole-source suppliers for certain of their needs. The existence of these practices makes it more difficult for us to gain new customers and to win repeat business from existing customers.

Other Risks

We may be subject to claims of infringement of third-party intellectual property rights, or demands that we license third-party technology, which could result in significant expense and prevent us from using our technology.

      We rely upon patents, trade secret laws, confidentiality procedures, copyrights, trademarks and licensing agreements to protect our technology. Due to the rapid technological change that characterizes the semiconductor and flat panel display process equipment industries, we believe that the improvement of existing technology, reliance upon trade secrets and unpatented proprietary know-how and the development of new products may be as important as patent protection in establishing and maintaining competitive advantage. To protect trade secrets and know-how, it is our policy to require all technical and management personnel to enter into nondisclosure agreements. We cannot guarantee that these efforts will meaningfully protect our trade secrets.

      There has been substantial litigation regarding patent and other intellectual property rights in the semiconductor related industries. We have in the past been, and may in the future be, notified that we may be infringing intellectual property rights possessed by other third parties. We cannot guarantee that infringement claims by third parties or other claims for indemnification by customers or end users of our products resulting from infringement claims will not be asserted in the future or that such assertions, if proven to be true, will not materially and adversely affect our business, financial condition and results of operations.

      Particular elements of our technology could be found to infringe on the intellectual property rights or patents of others. Other companies may hold or obtain patents on inventions or otherwise claim proprietary rights to technology necessary to our business. For example, twice in 1992 and once in 1994 we received notice from General Signal Corporation that it believed that certain of our tool automation products infringed General Signal’s patent rights. We believe the matters identified in the notice from General Signal were also the subject of a dispute between General Signal and Applied Materials, Inc., which was settled in November 1997. There are also claims that have been made by Asyst Technologies Inc. that certain products we acquired through acquisition embody intellectual property owned by Asyst and claims that have been made by Newport Corporation that certain of our products embody intellectual property owned by Newport. To date no action has been instituted against us directly by General Signal, Applied Materials, Asyst or Newport.

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BROOKS AUTOMATION, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS — Continued

      We cannot predict the extent to which we might be required to seek licenses or alter our products so that they no longer infringe the rights of others. We also cannot guarantee that the terms of any licenses we may be required to seek will be reasonable. Similarly, changing our products or processes to avoid infringing the rights of others may be costly or impractical and could detract from the value of our products. If a judgment of infringement were obtained against us, we could be required to pay substantial damages and a court could issue an order preventing us from selling one or more of our products. Further the cost and diversion of management attention brought about by such litigation could be substantial, even if we were to prevail. Any of these events could result in significant expense to us and may materially harm our business and our prospects.

      Our failure to protect our intellectual property could adversely affect our future operations.

      Our ability to compete is significantly affected by our ability to protect our intellectual property. Existing trade secret, trademark and copyright laws offer only limited protection, and certain of our patents could be invalidated or circumvented. In addition, the laws of some countries in which our products are or may be developed, manufactured or sold may not fully protect our products. We cannot guarantee that the steps we have taken to protect our intellectual property will be adequate to prevent the misappropriation of our technology. Other companies could independently develop similar or superior technology without violating our intellectual property rights. In the future, it may be necessary to engage in litigation or like activities to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of proprietary rights of others, including our customers. This could require us to incur significant expenses and to divert the efforts and attention of our management and technical personnel from our business operations.

If the site of the majority of our manufacturing operations were to experience a significant disruption in operations, our business could be materially harmed.

      Most of our manufacturing facilities are concentrated in one location. If the operations of these facilities were disrupted as a result of a natural disaster, fire, power or other utility outage, work stoppage or other similar event, our business could be seriously harmed because we may be unable to manufacture and ship products and parts to our customers in a timely fashion.

Our business could be materially harmed if one or more key suppliers fail to deliver key components.

      We currently obtain many of our key components on an as-needed, purchase order basis from numerous suppliers. We do not generally have long-term supply contracts with these suppliers, and many of them have undertaken cost-containment measures in light of the recent downturn in the semiconductor industry. In the event that the industry upturn we appear to be experiencing continues in future months or quarters these suppliers could face significant challenges in delivering components on a timely basis. Our inability to obtain components in required quantities or of acceptable quality could result in delays or reductions in product shipments to our customers. This could cause us to lose customers, result in delayed or lost revenue and otherwise materially harm our business. In May 2004, we entered into and announced a subcontracting agreement pursuant to which some on-site support services and spare parts management for previously installed factory automation hardware products is provided by a third party. Should this third party experience difficulty in meeting commitments, this could cause us to lose customers, result in delayed or lost revenue or otherwise materially harm our business.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS — Continued

Our stock price is volatile.

      The market price of our common stock has fluctuated widely. For example, between April 14, 2003 and September 8, 2003, the price of our common stock rose from approximately $7.80 to $27.68 per share and between January 28, 2004 and July 23, 2004, the price of our common stock dropped from $27.20 to $14.69. The market price of our common stock reached a recent low of approximately $7.59 on April 11, 2003. Consequently, the current market price of our common stock may not be indicative of future market prices, and we may be unable to sustain or increase the value of an investment in our common stock. Factors affecting our stock price may include:

	•		variations in operating results from quarter to quarter;
	•		changes in earnings estimates by analysts or our failure to meet analysts’ expectations;
	•		changes in the market price per share of our public company customers;
	•		market conditions in the industry;
	•		general economic conditions;
	•		political changes, hostilities or health risks such as SARS;
	•		low trading volume of our common stock; and
	•		the number of firms making a market in our common stock.

      In addition, the stock market has recently experienced extreme price and volume fluctuations. These fluctuations have particularly affected the market prices of the securities of high technology companies like ours. These market fluctuations could adversely affect the market price of our common stock.

Provisions in our organizational documents, contracts and 4.75% Convertible Subordinated Notes due 2008 may make it difficult for someone to acquire control of us.

      Our certificate of incorporation, bylaws, contracts and 4.75% Convertible Subordinated Notes Due 2008 contain provisions that would make more difficult an acquisition of control of us and could limit the price that investors might be willing to pay for our securities, including:

	•		the ability of our board of directors to issue shares of preferred stock in one or more series without further authorization of stockholders;
	•		a prohibition on stockholder action by written consent;
	•		the elimination of the right of stockholders to call a special meeting of stockholders;
	•		a requirement that stockholders provide advance notice of any stockholder nominations of directors to be considered at any meeting of stockholders;
	•		a requirement that the affirmative vote of at least 80 percent of our shares be obtained for certain actions requiring the vote of our stockholders;
	•		a requirement under our shareholder rights plan that, in many potential takeover situations, rights issued under the plan become exercisable to purchase our common stock at a price substantially discounted from the then applicable market price of our common stock; and
	•		a requirement upon specified types of change of control that we repurchase the 4.75% Convertible Subordinated Notes at a price equal to 100% of the principal outstanding amount thereof, plus accrued and unpaid interest, if any.

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Item 3. Quantitative and Qualitative Disclosure About Market Risk

Interest Rate Exposure

      At June 30, 2004, we had no variable interest rate debt. Accordingly, a 10% change in the effective interest rate percentage would not materially affect the consolidated results of operations or financial position.

Currency Rate Exposure

      Our foreign revenues are generally denominated in United States dollars. Accordingly, foreign currency fluctuations have not had a significant impact on the comparison of the results of operations for the periods presented. The costs and expenses of our international subsidiaries are generally denominated in currencies other than the United States dollar. However, since the functional currency of our international subsidiaries is the local currency, foreign currency translation adjustments do not impact operating results, but instead are reflected as a component of stockholders’ equity under the caption “Accumulated other comprehensive income (loss)”. As certain of our manufacturing costs are denominated in foreign currency, weakness in the United States dollar can generate margin pressure. To the extent that we expand our international operations or change our pricing practices to denominate prices in foreign currencies, we will be exposed to increased risk of currency fluctuation. Assets and liabilities of our international subsidiaries are translated at period end exchange rates. As such, foreign currency fluctuation results in increases and decreases in translated foreign currency assets and liabilities with the resulting offset being reflected in “Accumulated other comprehensive income (loss)”.

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Item 4. Controls and Procedures

	a)		Evaluation of Disclosure Controls and Procedures. As of the end of the period covered by this Report, and pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, the Company’s chief executive officer (“CEO”) and chief financial officer (“CFO”) have concluded, subject to the limitations inherent in such controls noted below, that the Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that it files under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time specified in the SEC’s rules and forms and are operating in an effective manner.
	b)		Limitations Inherent in All Controls. The Company’s management, including the CEO and CFO, recognizes that our disclosure controls and our internal controls (discussed below) cannot prevent all error or all attempts at fraud. Any controls system, no matter how well crafted and operated, can only provide reasonable, and not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints that affect the operation of any such system and that the benefits of controls must be considered relative to their costs. Because of the inherent limitations in any control system, no evaluation or implementation of a control system can provide complete assurance that all control issues and all possible instances of fraud have been or will be detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake.
	c)		Change in Internal Controls. There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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