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                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

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

                     FOR THE FISCAL YEAR ENDED JUNE 27, 1998
                         COMMISSION FILE NUMBER 0-22646

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                      APPLIED SCIENCE AND TECHNOLOGY, INC.
                         (Name of Issuer in its Charter)

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                DELAWARE                                        04-2962110
    (State or Other Jurisdiction of                          (I.R.S. Employer
     Incorporation or Organization)                       Identification Number)


  35 CABOT ROAD, WOBURN, MASSACHUSETTS                          01801-1053
(Address of Principal Executive Offices)                        (Zip Code)

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                                 (781) 933-5560
              (Registrant's Telephone Number, Including Area Code)

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           SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
                                 Title of Class

                          COMMON STOCK, $0.1 PAR VALUE

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INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.

                            YES  X         NO
                                ---           ---
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K .

The aggregate market value of the shares of Common Stock, held by non
affiliates, based upon the average of the closing bid and asked prices for such
stock on September 18, 1998 was approximately $32,360,000. As of September 18,
1998, 8,606,763 shares of Common Stock, $.01 par value per share, were issued
and outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement for the Company's Annual Meeting of
Stockholders to be held on November 19, 1998, are incorporated by reference into
Part III of this Form 10-K.

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ITEM 1.    BUSINESS

INTRODUCTION

Applied Science and Technology, Inc. (the "Company" or "ASTeX") is a leading
provider of innovative production technology for the manufacture of advanced
semiconductor devices. The Company's products are typically used in plasma
production techniques in which gases are heated to form a plasma which
chemically interacts with a substrate material, as well as in microwave, radio
frequency ("RF"), and direct current ("DC") power generation techniques. Based
on its estimates of the market, management believes that the Company is the
leading worldwide supplier of plasma equipment to its markets.

The Company provides patented and proprietary components and subsystems, as well
as engineering and scientific expertise, to semiconductor capital equipment
manufacturers ("SCEMs") for semiconductor production, as well as to advanced
medical capital equipment manufacturers ("MCEMs"). The SCEM equipment performs
essential process steps and includes plasma sources and subsystems and specialty
power sources and subsystems for photoresist stripping, passivation, etching,
thin film deposition and surface cleaning; and ozone generators and subsystems
for low-temperature deposition of insulating layers in integrated circuits.
ASTeX's major customers include Applied Materials, Inc. ("Applied Materials"),
GaSonics International, Inc. ("GaSonics"), Lam Research Corporation ("Lam
Research"), and Watkins-Johnson Company ("Watkins-Johnson"). Their customers
(IBM, Intel, Motorola, et al.) use ASTeX equipment to manufacture the latest
generation of advanced memory devices and microprocessors such as Pentium and
PowerPC chips.

ASTeX markets the same underlying core technology for medical, electro-optic and
synthetic diamond applications. Products include specialty power sources
covering the power delivery spectrum including DC, RF, and microwave generators.
Medical applications include magnetic resonance imaging ("MRI"), medical
equipment sterilization, and medical lasers for dermatology. The Company also
provides specialty DC power supplies for digital projection applications in the
electro-optics market, and for laser marking.

Outside of the semiconductor market, the Company's plasma processing equipment
is used to produce synthetic diamond using a chemical vapor deposition ("CVD")
process. Diamond is an ideal material for a wide variety of uses because of its
extreme hardness, excellent thermal conductivity, and other unique properties.
Based on its estimates, management believes that the Company continues to be the
leading commercial equipment supplier to this market.

An M.I.T. spin-off founded in January 1987, the Company has achieved
profitability in 10 of the last 12 years and year-to-year revenue growth in 11
of the last 12 years. The Company completed an initial public offering in
November 1993 which raised net proceeds of approximately $15.9 million to fund
R&D activities, expand manufacturing facilities, fund increased sales and
marketing efforts, fund increased inventory and accounts receivable, fund the
acquisition of complementary businesses and provide general working capital. The
Company's balance sheet at June 27, 1998 includes $7.7 million of cash and
investments, $28.6 million of working capital, tangible net worth of $38.7
million, a current ratio of 4.8 to 1 and no long-term debt.

For the fiscal year ending June 27, 1998 ("Fiscal 1998"), the Company achieved
record revenues for the year of $83 million, a 74% increase over the $48 million
reported in the prior fiscal year ending June 28, 1997 ("Fiscal 1997"). Net
earnings for the year were $4.0 million, or $0.47 per share diluted, including
an in-process research and development ("R&D") write-off of $212,000 associated
with the acquisition of ASTeX Sorbios GmbH in the second quarter. This
performance occurred during a severe downturn in the semiconductor capital
equipment industry during the last half of Fiscal 1998.

The Company continued to invest heavily in R&D during Fiscal 1998, leading to a
series of new product introductions and design wins. During the year, the
Company continued to strengthen its overall capability both through additions to
the senior management team and through the acquisition of ASTeX


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Sorbios. Management believes that ASTeX is well positioned as an enabling
supplier of advanced technology solutions.

MARKETS

The Company's primary market consists of subsystems for semiconductor
processing, sold to SCEMs. The Company markets its specialty power supplies to
MCEMs for diagnostic imaging, medical equipment sterilization, and dermatology
and to other OEMs for industrial lasers and electro-optic applications. The
Company markets its plasma equipment outside the semiconductor industry to end
users for producing CVD diamond and for other industrial applications.

SUBSYSTEMS FOR SEMICONDUCTOR PROCESSING

The Company's power supply, plasma and ozone production technologies are used in
semiconductor manufacturing equipment. According to DataQuest, Inc.
("DataQuest"), a market research and consulting firm, the world market for
silicon wafer processing equipment is expected to increase from $22 billion in
1996 to $38 billion in the year 2000. However, DataQuest predicts a decline of
at least 15% in 1998, to $18 billion. The component and subsystem segments of
this market, which are available to ASTeX, are estimated by management to be
approximately $500 million per year and projected to grow to more than $1
billion over the next five years. Management believes that the total available
market for ASTeX in this industry can be expanded significantly through the
development or acquisition of complementary product lines.

Segments of the market, particularly the plasma etch and deposition segments
currently served by the Company are expected to grow at a rate faster than the
overall market. According to DataQuest, critical market needs include
high-density plasmas for dry etch processes for fabricating dynamic random
access memory ("DRAM") and logic devices, as well as high-density plasma
deposition sources for premetal and intermetal dielectric, as well as
metallization for fabricating advanced microprocessors. The fabrication of these
newer, more complex devices employs the microwave and RF plasma and ozone
production technologies offered by the Company. Moreover, with the ongoing trend
of reduced cost of ownership of manufacturing tools, more efficient cleaning
processes, such as the fluorine process that is offered by the Company, become
more crucial.

Management believes these increases in plasma-related segments represent a
significant opportunity for the Company. Much of this increase is due to more
complex semiconductor products that are required for use in lap-top and other
personal computers, portable communications and application-specific consumer
electronics. The extension of the market for these devices beyond the
traditional personal computer market is also considered by many to imply
longer-term stability and less volatility in the growth of the market, as the
products in which the devices are used become more diverse and targeted at a
larger segment of the population.

Technology shifts within the industry also provide significant new opportunities
for the Company. In particular, the transition to finer line widths (e.g. 0.25
micron and below) provide opportunity for customers to adopt the Company's
products which enable these transitions to take place.

Another factor affecting the Company's growth has been the structural changes in
the SCEM market. As this industry grows and matures, many of the large SCEMs are
working more directly with companies such as ASTeX in order to implement the
concept of lean manufacturing. Under this concept, suppliers provide a more
fully integrated, complete subsystem solution rather than supplying individual
components. This offers advantages of reduced cycle times, reduced fixed costs,
and a reduced number of suppliers with the overall result of improved efficiency
for the SCEM. ASTeX has been able to take advantage of this transition by
working with its customers to develop and deliver integrated solutions and
through this process to establish its strategic position as a leading supplier
of advanced technologies to the semiconductor capital equipment industry.


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ASTeX also has the opportunity to sell retrofittable subsystems, both to the
SCEMs and directly to the semiconductor fabricators. This may provide for a
further expansion of the Company's existing product revenues.

SPECIALTY POWER SUPPLIES

The Company supplies critical RF power subsystems for diagnostic imaging and
medical equipment sterilization applications, and DC switching power supplies
for medical and industrial lasers and electro-optics.

MRI is a diagnostic imaging modality which uses RF energy to excite the body's
hydrogen molecules in a strong magnetic field. The excited molecules produce a
radio signal that can be translated into images. MRI competes with x-ray and CT
(computed tomography) imaging systems. MRI is especially effective in imaging
soft tissue (brain) and tissue surrounded by bone (spinal cord).

The MRI market experienced significant growth in the late 1980s due to the rapid
expansion of the installed base in the U.S. Currently, the worldwide growth rate
is estimated between 5 and 10% annually. ASTeX is a leading supplier of RF
linear amplifiers to the MRI equipment market. Management estimates that the
total available MRI market for products currently offered by the Company is
approximately $25 million.

ASTeX provides RF power subsystems to a manufacturer of a medical equipment
sterilization system which received FDA approval in late 1993. This system uses
an RF-excited plasma to remove contaminants and sterilize medical instruments
and material without leaving toxic residue. The system has been well received in
the market worldwide. The plasma-based method competes with high temperature
steam autoclaves and low temperature chemical baths. The plasma-based method
significantly reduces instrument wear caused by the steam autoclave and
eliminates the handling of toxic chemicals inherent with the chemical baths.
Management anticipates that sales of these systems could grow significantly over
the next several years.

The Company provides a complete line of DC switching power supplies to a number
of medical manufacturers. These supplies feature outstanding quality and exhibit
excellent field operation characteristics, in particular, mean time between
failure ("MTBF") numbers in excess of 100,000 hours. In the medical laser
market, strong growth is being driven by increasing demand following FDA
approval for dermatology procedures, including hair and wrinkle removal. Use in
urology and arthroscopic applications is growing at a moderate pace.

Use of continuous wave ("CW") YAG lasers for marking is a rapidly growing market
with many new applications. Date or product code marking of food and medical
packaging with a laser has replaced ink in many products. Metal, plastic and
paper products use marking lasers for serial numbers to reduce cost and increase
throughput.

In the electro-optics market, the Company provides DC switching power supplies
for digital projection applications and medical endoscopy.

The Company's focus on specialty power supplies is driven by the technological
synergies with, and need for, these types of products in the semiconductor and
medical markets, and by the desire to balance the cyclical nature of the
semiconductor industry by commercializing this common technology in areas
outside of semiconductor processing.

PLASMA PROCESSING

The largest opportunity for the Company's plasma processing equipment outside of
the semiconductor industry is currently microwave plasma CVD of diamond and
diamond-like carbon ("DLC") films. Diamond has a unique combination of physical
characteristics that are not found in other materials. Diamond is the hardest
material available, can be highly transparent, and at room temperature is the
best thermal conductor (conducting heat five times better than copper). In
addition, diamond is an excellent


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electrical insulator and, conversely, when controlled quantities of impurities
are introduced, becomes a semiconductor. Diamond is also resistant to most
chemicals and to radiation and, when polished, is almost frictionless.

Because of its outstanding properties, CVD diamond has found commercial use in a
broad range of applications, including wear coatings to greatly extend the lives
of cutting tools and machine components; electronic packaging materials to
reduce the operating temperature and thereby improve the output, reliability,
and lifetime of electronic components; transparent windows for infrared sensors
in aggressive chemical environments, microelectro-mechanical devices for
electrodes and detectors, and as field emitters for next-generation flat panel
display devices.

As the leading equipment supplier to the CVD diamond market, one of ASTeX's key
goals is to drive down the cost of CVD diamond deposition, in order to enable a
wider range of cost effective applications, and thus expand the market for ASTeX
deposition systems. In addition, ASTeX partners with its customers in the
product development process in an effort to reduce the time to market for new
CVD diamond applications.

The Company also sells its plasma processing products for advanced industrial
processes for a variety of applications.

CURRENT PRODUCTS

Virtually all of the Company's products including its ozone generators and
systems are based on DC, RF, microwave or plasma technologies. These
technologies represent the confluence of the Company's core technical
competencies in plasma physics and chemistry, high-voltage switching power
supplies, RF and microwave engineering, and integrated systems engineering. The
Company's products range from fully integrated turnkey systems for ozone
delivery or CVD diamond production to DC, RF, microwave, plasma and ozone
components designed for high-volume original equipment manufacturers.

The Company produces a broad range of products: plasma systems for chamber clean
and photoresist strip, combined RF/microwave power and control systems,
microwave plasma sources, DC, RF and microwave power generators, turnkey ozone
supply systems for deposition and wet bench applications, and ozone generators
that are sold to OEMs and end-users along with the Company's engineering and
technical support. In addition, the Company sells a large selection of auxiliary
components and spare parts often combining or integrating these components to
meet a customer's specific configuration requirements.

The RF and microwave generators range in price from $7,500 to $40,000 and are
used to provide precise stable energy to plasma sources utilized for etch, strip
and CVD applications. Plasma systems and combined RF/microwave power and control
systems offer integrated solutions to etch, strip and CVD applications that
provide the Company's technology expertise and support, reduced cost and
improved time to market for SCEMs. The Company's systems range in price from
$20,000 to $75,000. Microwave plasma sources generally range in price from
$17,500 to $125,000 and are used for the same applications but are typically
fully integrated onto the customer's machines by ASTeX. Ozone generators and
turnkey ozone systems generally range in price from $12,500 to $140,000 and are
used to deliver high-purity ozone for film deposition and wafer cleaning
applications. Typical products manufactured with all of these devices include
advanced microprocessors and DRAMs. Each of these products can be used to
perform several steps of the manufacturing processes for these devices. Ozone
generators and delivery systems are also widely sold for "wet phase"
applications, in which ozone is mixed into water systems used by SCEMs to
achieve improved cleaning performance.

RF amplifiers used in magnetic resonance imaging ("MRI") systems range in price
from $18,600 to $36,000. RF generators used in medical equipment sterilization
systems are priced between $2,900 and $3,500. The Company offers a range of DC
switching power supplies for medical and industrial lasers and electro-optic
applications which range in price from $300 to $7,100, with an average selling
price of approximately $3,000.


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The most exciting products are the microwave and fluorine generators and
delivery systems for SCEM processing chamber cleaning, which are installed and
retrofit by both OEMs and end users. In particular, the Company has developed an
atomic fluorine generator, ASTRON(TM), for chamber clean applications. Producing
a high flux of atomic fluorine allows for high-rate processing while a compact,
integrated design allows for easy integration with semiconductor production
tools. The Company offered initial shipments in limited quantities during Fiscal
1998 and is preparing for volume production ramping during Fiscal 1999.

During Fiscal 1997, the Company completed the development of its Chemical Plasma
Source ("CPS") that is an integrated solution for photoresist strip
applications. The product has been accepted under a volume supply agreement for
integration into a new generation of etch equipment and shipments increased in
Fiscal 1998, and are expected to increase further in Fiscal 1999 as the new
equipment is accepted in the market place.

During Fiscal 1997, the Company also completed development and introduction of
three-channel and four-channel combined RF/microwave power and control systems
for oxide etch and insulator deposition. These products were accepted under a
volume supply agreement and production was ramped during the year. Revenues from
these products increased significantly in Fiscal 1998, as the new tool was
accepted in the market place, and are expected to increase further during Fiscal
1999 as major semiconductor manufacturers have selected this tool to be the
standard deposition system for their leading-edge devices.

The Company's diamond deposition products serve both the university and
industrial R&D market as well as industrial manufacturing. Prices on the
products range from under $100,000 for basic research systems to over $500,000
for highly automated production systems.

The Company manufactures electron cyclotron resonance ("ECR") sources used to
provide high quality thin films without the high temperatures required in
conventional CVD processing. Low temperature operation expands the range of
materials for which the Company's components can be used. Typical materials
include temperature sensitive indium phosphide laser diodes, gallium arsenide
semiconductor devices, and DLC films. ECR plasma sources can be used in a
variety of applications such as plasma etching, low temperature plasma enhanced
deposition, and surface cleaning. Prices for these products currently range from
approximately $30,000 to $60,000.

The Company completed the development of high performance RF linear amplifiers
for advanced MRI applications during Fiscal 1998. In addition, new RF generator
technology has been developed for use in medical equipment sterilization
systems. The Company has developed several new DC switching power supplies for
medical applications to offer improved price/performance. These went into
production during Fiscal 1998, and will be widely offered to customers and
installed during Fiscal 1999.

PRODUCTS UNDER DEVELOPMENT

The Company is developing a new line of intelligent microwave power supplies,
SmartPower(TM), primarily for use in the semiconductor industry. These
generators were introduced in July 1998 and offer lower cost of ownership with
the inclusion of advanced self-diagnostics for maximum uptime and precision
power measurement capability for process repeatability. These generators are
expected to go into production during Fiscal 1999.

The Company has continued development of multiple models of a turnkey ozone
delivery system which incorporates the Company's plasma, power supply and
systems engineering expertise. These products are based on the ASTeX modular
platform which is then customized to meet a particular customer's requirements.
These systems are now in volume production for the Company's SCEM customers.

The Company has just completed the development and release of a new ozone
generator product, SOLO3(TM). The product is an extension of the patented, high
performance, reliable ASTeX AX8000 ozone generator technology, offering
no-dopant ozone generation and lower cost of ownership. The Company plans to
offer the product to existing customers as well as pursue a new product
application,


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wet bench cleaning, where ozonated fluids (de-ionized water, sulfuric acid and
HCl) offer lower cost and/or more environmentally acceptable solutions for a
wide range of cleaning applications.

During Fiscal 1998, the Company initiated the development of a new line of ozone
delivery systems for wet chemistry applications, mainly for injection of ozone
into DI water systems of wet benches. The Company completed the development of
the prototypes which have been installed during the last quarter of Fiscal 1998.
This technology will be further developed and widely offered in the marketplace
for use by OEMs as well as end users.

The Company continues to improve the capability and performance of its high
power production diamond deposition system, the AX6600. This system is now being
productized in anticipation of initial orders for this product from key CVD
diamond customers in Fiscal 1999.

RESEARCH AND DEVELOPMENT

The Company's research and development strategy is focused on deep involvement
in understanding the unique technical problems faced by those in the industries
it serves and, in particular, its current customer base, and end users of its
products.

During Fiscal 1998, 1997, and 1996, total research and development expenses
(including expenses attributable to certain research contracts which are
expensed as incurred and included in cost of revenue) were approximately $12.0
million, $8.7 million, and $6.9 million, or 14%, 18%, and 18% of the Company's
revenues, respectively. The Company also receives funding for certain research
and development costs which is used to offset these research and development
expenses. Internally funded research and development expenditures, net of
funding received, were approximately $11.3 million, $7.3 million, and $5.0
million during Fiscal 1998, 1997, and 1996, respectively. Due to the highly
technical nature of the Company's business, rapidly expanding markets, and new
technologies under development, management expects to continue to expend
significant funds in future years on research and development activities.
Management expects that it will continue to fund a significant portion of its
research and development expenses through customer development contracts,
government funded research, and cash flows from operations. The Company intends
to supplement these available cash resources by using possible future joint
ventures or collaborative research with other manufacturers and government
laboratories to develop new products and processes.

The Company has received development contracts directly from its SCEM customers
for products specific to their applications, but which also have other market
potential. These include agreements for the development of next-generation
microwave generators and advanced plasma sources. ASTeX uses such funding as a
means of accelerating its product development and is generally not restricted
from selling developed products widely in the SCEM marketplace.

In any particular case, exclusivity is negotiated based on the scope of the
required development program, the technical risk, and the overall market
potential. Frequently, the Company funds the entire development program
internally and exclusivity is not an issue. In some cases, the product may be
needed by a particular customer who might fund the development simply to ensure
its availability in the marketplace. In other cases, the development program may
entail a high degree of technical risk, may require a significant investment
beyond what the Company would fund on its own, and may require the participation
of ASTeX's customer's customer through the need to process device wafers. In
this case, the Company may grant exclusivity to its customer for its specific
market in exchange for program funding, with the goal of manufacturing the new
product in the event the development program is successful.

In conjunction with CVD diamond equipment development, the Company is working to
develop diamond growth processes which will allow its production equipment to
produce diamond at reduced cost and thereby expand its commercial applications.
The Company has developed modeling codes and process technologies for optical,
thermal, and material removal (cutting tool) applications. Researchers are
examining additional applications using microwaves and plasmas for other
manufacturing processes. The Company is currently collaborating with several
major firms and anticipates awards or continuation


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of awards with a number of partners for additional government funding for
diamond and specialty materials development, as well as partnerships with major
diamond growth commercial companies overseas.

Supporting the Company's research and development group are nine Ph.D.s as well
as 22 engineers and scientists holding masters degrees. A number of other
electrical, mechanical and process engineers as well as external consultants and
designers support the Company's research and development programs. Management
believes that these individuals constitute one of the largest groups of
engineers and scientists assembled in these fields in a commercial enterprise.

SIGNIFICANT CUSTOMERS AND CONTRACTS

During Fiscal 1998, 1997, and 1996, Applied Materials accounted for
approximately 40%, 38%, and 45% of the Company's consolidated total revenue.
Phillips Medical Systems accounted for approximately 6% of the Company's total
revenue in Fiscal 1998 and 10% in Fiscal 1997. The loss of Applied Materials or
Phillips Medical Systems would have a materially adverse effect on the Company.
No other customer accounted for more than 5% of total revenue in Fiscal 1998.

While sales to Applied Materials represent a large fraction of the Company's
total revenues, Applied Materials is the world's leading SCEM and it typically
dominates the market areas it serves. Therefore, the Company's sales to Applied
Materials are consistent with Applied Materials' market share. The Company's
strategy for reducing the total percentage of revenues due to Applied Materials
is to increase product revenues from other major SCEMs by increasing the range
of products offered by the Company and by expanding the range of semiconductor
process applications for which the Company's products can be used. The Company
is also exploring the opportunity of acquiring complementary businesses with
established sales organizations and complementary product lines and customers.
As part of the SCEM "food chain," the Company is restructuring to be better
positioned in view of the slowdown in this industry, which is projected to
continue through Fiscal 1999. The Company will also explore other new
applications in specific markets that are projected to grow rapidly.

In the semiconductor market, the Company sells DC, RF, microwave, and fluorine
generators and subsystems, microwave plasma sources and subsystems, and ozone
generators and subsystems to Applied Materials, GaSonics, Lam Research,
Novellus, Quester Technology, Ulvac, Varian, Watkins-Johnson and a number of
others. During Fiscal 1997, the Company received new supply agreements and
additions to existing supply agreements from major semiconductor capital
equipment manufacturers totaling $46,000,000. These multi-year supply agreements
typically provide for cancellation or modification with little or no penalty. In
addition, customers may push out deliveries, put firm orders on hold, or cancel
existing firm orders with little or no penalty.

The largest ever contract for the Company's DC power supplies for medical lasers
was signed recently with an overseas customer. This contract anticipates volumes
of as much as 6% of the Company's projected total revenue during Fiscal 1999.

The Company is the leading worldwide supplier of diamond deposition systems and
components to companies producing CVD diamond and products incorporating CVD
diamond, and to researchers exploring the use of CVD diamond. The Company
estimates it has an installed base of reactors and systems for diamond
production and development in excess of 200 units worldwide. Diamond and ECR
customers in Fiscal 1998 include major U.S.-based industrial and research firms,
European commercial and governmental R&D organizations and many others
worldwide. During Fiscal 1998, the Company continued its penetration of the
Japanese market with sales of several of its diamond deposition sources and
systems. Customers in Japan include major industrial companies as well as
universities and research institutions.

MARKETING AND SALES

In order to introduce the Company's products aggressively to global markets, a
Global Customer Operations ("GCO") organization was established during the last
quarter of Fiscal 1998. This


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organization, presenting "one face to the customer worldwide," comprises the
entire marketing, sales, service, and product management group of the Company.
The organization is structured around regional offices worldwide, allowing
direct marketing, sales, and service activities, and more controlled activities
of its independent sales and distribution representatives. During Fiscal 1998,
the GCO organization established regional operation headquarters for the western
U.S. region (Santa Clara, CA), central U.S. region (Austin, TX), eastern U.S.
region (Woburn, MA), and Europe (Berlin, Germany). During Fiscal 1999, the GCO
will establish further direct sales and service offices in the Far East (mainly
in Korea, Taiwan, and Japan), and more locations in Europe. The GCO also manages
the functional infrastructure to provide excellence in the main areas of
activity, namely, sales, service, marketing, and product management.

MANUFACTURING AND SUPPLIES

The Company's products are manufactured in facilities at Beverly, Newton, and
Woburn, Massachusetts, Colorado Springs, Colorado and Modesto, California. Many
of the components for the Company's products are manufactured by a number of
suppliers, and final assembly, integration, testing, and quality assurance are
then performed by Company personnel at the Company's facilities. The Company
typically provides one-year warranties for its products. The Company obtains
many components and ships many of its products under "just-in-time"
arrangements. The Company relies on certain (fewer than 5) foreign manufacturers
for certain components but believes that these components could be obtained
elsewhere if needed or that the Company's products could be redesigned to use
alternative suppliers' products. However, no assurance can be given that other
supply sources would be available without significant delay or increased cost.

During Fiscal 1999, the Company's Beverly, Massachusetts and Modesto, California
facilities will be consolidated, primarily into the Woburn, Massachusetts
facility and secondarily into the Colorado facility.

COMPETITION

The Company believes that it is the largest provider of microwave plasma sources
and microwave power supplies in the world, facing competition from providers
such as Muegge in Germany and Daihen in Japan. The Company also believes that it
possesses a significant share of the SCEM ozone generator market. The Company
competes in a number of markets with companies which provide competition in
certain market niches. In the ozone generator market the Company competes with
companies such as Sumitomo Precision Products and Ebara. With the acquisition of
Sorbios, a major competitor was eliminated. In addition, the Company also
competes with others who supply various stand-alone components in the
semiconductor equipment market (e.g. power supplies or plasma sources) such as
Daihen in Japan. Many SCEM customers develop equipment similar to the equipment
ASTeX provides through their proprietary in-house equipment development
programs. No assurance can be given that these or other firms will not develop
new or enhanced products which are more effective than those offered by the
Company.

The Company believes its major competitors for RF generators and amplifiers to
be ENI, a subsidiary of Astec (BSR) Plc, Advanced Energy Industries, Inc., RF
Power Products, Inc., Comdel, Erbtec Engineering, and Analogic. The Company
believes its major competitors for DC switching power supplies to be ALE
Systems, Analog Modules, and Kaiser Systems for laser applications, and Buhl,
Tectrol, and Walker Power for electro-optics.

The Company's strategy is to compete on the basis of its technical expertise,
core competencies, high quality and reliability, established reputation and
customer relationships, its sponsor base which provides funding for research and
development of products, and its key personnel, many of whom are recognized
experts in the fields of microwave plasma technology, semiconductor processing
technology, and diamond production. The Company expects plasma processing to
continue to develop. The Company's success will depend upon its ability to
maintain a competitive position for its products in the marketplace. To do so,
the Company must develop and enhance its technology and products to keep pace
with technological changes in production equipment and advanced materials
processes. In addition,


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the Company must have world-class manufacturing capabilities in order to meet
the needs of its customers. Moreover, the Company intends to diversify its field
of served industrial customers to leverage more of its capabilities in the
medical equipment industry and in other industrial applications.

The Company believes that a number of factors will affect its competitive
position in the future, including its ability to develop and manufacture new
products that meet the needs of its markets and respond to competitive
developments and technological changes; its ability to manufacture its products
on a cost effective basis; continued market acceptance; its ability to retain a
highly qualified scientific and engineering staff; general domestic and
international economic conditions and exchange rates; its ability to reach out
directly for sales and service to a large customer base worldwide; and its
ability to diversify to other industries.

The Company believes that it is the leading worldwide supplier of CVD diamond
production systems and sources. Nonetheless, many companies and academic
institutions have developed and are capable of developing competing products
based on technologies similar to the Company's or on other technologies. A
number of organizations, including Crystallume, DeBeers, Diamonex, Inc. (a
division of Monsanto Corporation), General Electric, and Norton Corporation are
developing new diamond coating technologies, although most are not currently
involved in the sales of diamond production equipment. Several companies make
CVD diamond equipment for internal use only and not for sale. No assurance can
be given that these companies will not sell CVD diamond equipment to outside
customers. Existing customers may also seek to develop proprietary equipment and
processes, which could adversely impact the Company's business. Several
companies, including SI Diamond, are seeking to develop new methods for
manufacturing diamond, utilizing different techniques, which may become
competitive with the Company's equipment. There are additional competitors in
the diamond market in Europe and Japan, several of which are seeking to sell
their products in other countries. Many of these potential competitors are well
established, and several have substantially greater financial resources than the
Company and have established success in the development, sale and service of
competitive products. No assurance can be given that these or other firms will
not develop new or enhanced products which are more effective than any that have
been developed by the Company.

PATENTS AND PROPRIETARY INFORMATION

The Company currently owns 20 U.S. patents and one Canadian patent, and has two
applications in various stages of preparation and filing. All pertain to
microwave plasma processes and devices or reactive gas generation devices. The
earliest of the issued patents considered material to the Company's business
expires in 2004. As a qualifying small business, the Company has retained
commercial ownership rights to proprietary technology developed under various
U.S. and government contracts and grants, including SBIR contracts. The Company
also has joint development agreements with industrial and commercial partners
which may result in sole or joint ownership rights to proprietary technology
developed under those agreements. The Company has three U.S. registered
trademarks: (1) ASTeX(R) (stylized letters), (2) Plasma Dome(R) and (3) Applied
Science and Technology, Inc(R).

During Fiscal 1998, ASTeX registered one new trademark and received four new
patents. In October 1997, the Company acquired ASTeX Sorbios and, as a part of
this acquisition, acquired three U.S. patents. Of these, two are related to
ozone, and one is related to air ionizers. In November 1997, ASTeX obtain a
patent on a microwave plasma sputter source.

In addition to its patent rights and with regard to its trade secrets, the
Company relies upon trade secrets and confidentiality agreements, which all of
its employees are required to execute, assigning to the Company all patent
rights and technical or other information developed by the employees during
their employment with the Company. The Company's employees, consultants,
customers, and potential customers have agreed not to disclose any trade secret
or confidential information without the prior written consent of the Company.
Notwithstanding these confidentiality agreements, no assurance can be given that
other companies will not acquire information which the Company considers to be
proprietary. Moreover, while the Company has successfully enforced one of its
patents and intends to continue to vigorously enforce its patents against
infringement by third parties, no assurance can be given that the


                                       9
<PAGE>   11
Company's patents will be enforceable or provide the Company with meaningful
protection from competitors, or that patent applications will be allowed. Even
if a competitor's products were to infringe patents owned by the Company, it
would be very costly for the Company to enforce its rights in an enforcement
action, which would also divert funds and resources which otherwise could be
used in the Company's operations. No assurance can be given that the Company
would be successful in enforcing such rights, that the Company's products or
processes do not infringe the patent or intellectual property rights of a third
party, or if the Company is not successful in a suit involving patents or other
intellectual property rights of a third party, that a license for such
technology would be available, if at all, on commercially reasonable terms.

GOVERNMENT REGULATION

The Company has entered into certain U.S. government contracts which require
compliance with applicable government regulations. The Company's contracts with
the U.S. government consist primarily of research and development contracts,
many of which are awarded under the SBIR program or through DARPA. Research and
development contracts are generally subject to competitive bidding and extensive
regulation and are generally subject to cancellation at the U.S. government's
sole discretion. The Company is required to obtain approval from the Department
of Commerce for the export of certain equipment.

BACKLOG

The Company's backlog consists of purchase orders for standard products and
contracts for research and development. At June 27, 1998 the Company's backlog
was approximately $11,763,000 of which $11,247,000 was for standard products and
$516,000 was for research contracts. The backlog at June 28, 1997 was
approximately $13,754,000 of which $13,340,000 was for standard products and
$414,000 was for research contracts. The Company expects to complete all
standard product backlog during the next six months and all research contract
backlog during the next twelve months. The backlog figures exclude orders under
three supply agreements with major semiconductor capital equipment
manufacturers. These multi-year supply agreements, as well as certain government
contracts, typically provide for cancellation or modification with little or no
penalty. In addition, customers may push out deliveries, put firm orders on
hold, or cancel existing firm orders with little or no penalty.

EMPLOYEES

As of June 27, 1998, the Company employed 416 persons on a full-time, permanent
basis, and an additional 60 temporary employees. The Company employs 56 persons
in administration, 28 in sales and marketing, 77 in research and development and
255 in manufacturing. The Company believes that its relations with its employees
are satisfactory.

ITEM 2.    FACILITIES

The Company occupies approximately 60,000 square feet of leased space in Woburn,
Massachusetts for its principal executive offices, research and development
center and manufacturing activities. This lease, amended to terminate on
June 30, 2000, contains further extension provisions allowing expansion up to
120,000 square feet in the Woburn area during the term of the lease. The current
rent for this facility is $45,279 per month, subject to increase as space is
added at the then current lease rate for the existing space and also subject to
annual adjustment for certain increases in the Consumer Price Index. ASTeX CPI
occupies approximately 31,000 square feet of leased space in Beverly,
Massachusetts. The Company has a five year lease on this facility which expires
in September, 2000, and which can be extended for an additional five years. The
current rent for this facility is $18,324 per month. The Company owns the 25,000
square feet of office, lab and manufacturing space of its ETO subsidiary located
in Colorado Springs, Colorado. The Company maintains office and manufacturing
facilities in Newton, Massachusetts in approximately 3,500 square feet of leased
space. This lease expires on June 30, 1999. The rent for this facility is $4,431
per month. The Company maintains office and manufacturing facilities in Modesto,
California in approximately 11,500 square feet of leased space. This lease will 
be terminated effective November 9, 1998. The Company maintains a sales and
service office in 6,400 square feet of leased space in Santa Clara, California.
The rent for this space is $10,988 per month and the lease expires on December
1, 2000. The Company also leases approximately 9,700 square feet in Berlin,
Germany for $7,386 per month through March 31, 2001.

During Fiscal 1999, the Company's Beverly, Massachusetts and Modesto, California
facilities will be consolidated, primarily into the Woburn, Massachusetts
facility and secondarily into the Colorado facility.


                                       10
<PAGE>   12

ITEM 3.    LITIGATION

The Company is not involved in any litigation of a material nature.

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

No matters were submitted to a vote of security holders during the fourth
quarter of Fiscal 1998 through the solicitation of proxies of otherwise.


                                     PART II


ITEM 5.    MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Corporation's Common Stock is traded on the National Association of
Securities Dealers Automated Quotation System - National Market System
("NASDAQ/NMS") under the symbol "ASTX." On November 26, 1997, the Company
announced a 3-for-2 split of its Common Stock, which was distributed to
shareholders in the form of a stock dividend on December 12, 1997. All prior
period share amounts have been adjusted to reflect the stock split. On
September 22, 1998, the closing bid and ask prices for the Corporation's common
Stock as reported by NASDAQ/NMS were $4 1/2 and $4 5/8, respectively. As of
September 23, 1998, the Corporation had 179 holders of record on its Common
Stock. Management believes that there are approximately 2,100 beneficial owners
of its Common Stock.

For the periods indicated, the following table sets forth the high and low
closing sale prices for the Common Stock as reported by NASDAQ/NMS for July 1,
1996 through September 22, 1998. Such quotations represent interdealer
quotations without adjustment for retail markups, markdowns, or commissions and
may not represent actual transactions.

                                                            Sale
                                                     ------------------
                                                       High       Low
                                                     -------    -------

1997

First Quarter                                        $ 8.417    $ 5.167
Second Quarter                                         8.500      4.500
Third Quarter                                          9.750      5.833
Fourth Quarter                                        11.333      6.083

1998

First Quarter                                        $15.583    $10.417
Second Quarter                                        18.333      9.750
Third Quarter                                         16.000     10.125
Fourth Quarter                                        17.250      7.625

1999

First Quarter (through September 22, 1998)           $ 8.000    $ 3.938


                                       11
<PAGE>   13
ITEM 6.    SELECTED CONSOLIDATED FINANCIAL DATA

<TABLE>
<CAPTION>
                                           ----------------------------------------------------------------------
YEARS ENDED                                     1998          1997          1996            1995         1994
                                           ----------------------------------------------------------------------
<S>                                         <C>           <C>           <C>             <C>           <C>
 Fiscal Year(1)

 OPERATIONS:
       Total revenue                        $83,436,135   $47,967,138   $ 39,135,596    $20,004,853   $13,357,471
       Gross profit                          28,449,528    17,409,904     15,771,626      8,191,621     6,109,033
       Operating income (loss)                5,909,039     1,658,805     (6,077,763)       798,955       358,110
       Net income (loss)                      4,020,604       937,759     (7,296,775)     1,127,748       518,041
       Diluted earnings (loss) per share    $      0.47   $      0.14   $      (1.16)   $      0.19   $      0.10
       Weighted average common
          shares outstanding                  8,528,947     6,777,440      6,307,146      5,988,150     5,150,700

  BALANCE SHEET:
       Working Capital                      $28,570,499   $16,956,302   $ 19,216,542    $17,671,056   $19,697,944
       Total assets                          51,293,306    39,327,211     34,361,426     25,077,534    24,569,572
       Total long-term debt                           -     6,368,913      6,169,517              -             -
       Total liabilities                      7,492,652    15,838,211     13,065,618      3,183,770     2,465,829
       Stockholders' equity                 $43,800,654   $23,489,010   $ 21,295,808    $21,893,764   $22,103,743
</TABLE>


<TABLE>
<CAPTION>
                                                1ST           2ND           3RD             4TH
                                           ---------------------------------------------------------
<S>                                         <C>           <C>           <C>             <C>

  QUARTERLY 1998:
       Total revenue                        $17,421,302   $22,439,794   $23,461,836     $20,113,203
       Gross profit                           6,474,017     8,229,818     8,207,417       5,538,276
       Acquisition-related expenses                   -       212,423             -               -
       Operating income (loss)                1,677,048     2,098,987     2,251,572        (118,568)
       Net income (loss)                      1,154,950     1,274,835     1,577,521          13,298
       Diluted earnings per share           $      0.14   $      0.15   $      0.18     $         -

  QUARTERLY 1997:
       Total revenue                        $ 9,860,340   $ 9,292,777   $11,012,532     $17,801,489
       Gross profit                           3,813,414     3,395,395     3,886,336       6,314,759
       Acquisition-related expenses                   -             -             -       1,500,000
       Operating income                         535,696       461,072       658,483           3,554
       Net income (loss)                        311,916       279,588       390,399         (44,144)
       Diluted earnings (loss) per share    $      0.05   $      0.04   $      0.06     $     (0.01)
</TABLE>

      (1) The fiscal year ends for the periods presented are: June 27, 1998;
      June 28, 1997; June 29, 1996; July 1, 1995; and July 2, 1994.



                                       12
<PAGE>   14
ITEM  7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

The following table contains income and expenses from the consolidated
statements of operations for Fiscal 1998, 1997, and 1996 expressed as a
percentage of total revenue.

<TABLE>
<CAPTION>
Fiscal Year                                      1998       1997        1996
                                               -------------------------------
<S>                                             <C>         <C>        <C>

Total revenue                                   100.0%      100.0%     100.0%
Total cost of sales and revenue                  65.9        63.7       59.7
                                               -------------------------------
Gross profit margin                              34.1        36.3       40.3
                                               -------------------------------
Selling expenses                                  5.3         6.2        8.4
General and administrative expenses               8.0         8.2        9.7
Research and development expenses, net           13.5        15.3       12.9
Acquisition-related expenses                      0.2         3.1        7.4
Write-off of goodwill                             0.0         0.0       17.4
                                               -------------------------------
Total operating expenses                         27.0        32.8       55.8
                                               -------------------------------
Earnings (loss) from operations                   7.1         3.5      (15.5)
                                               -------------------------------
Total other expense (income)                     (0.7)        0.4       (0.8)
                                               -------------------------------
Earnings (loss) before income taxes               7.8         3.1      (14.7)
Income tax expense                                3.0         1.1        3.9
                                               -------------------------------
Net earnings (loss)                               4.8%        2.0%     (18.6)%
                                               ===============================
</TABLE>

FISCAL YEAR 1998 COMPARED TO FISCAL YEAR 1997

REVENUES

Total revenue increased by 74% for Fiscal 1998 to $83,436,000 compared to Fiscal
1997. This growth was a result of increased revenues from the acquisitions of
Converter Power, Inc. ("ASTeX CPI") in May 1997 and Sorbios GmbH ("ASTeX
Sorbios") in October 1997, increased sales to semiconductor capital equipment
customers, and increased sales of specialty power supplies. Semiconductor
related revenues, including revenues from ASTeX CPI and ASTeX Sorbios, increased
by $22,066,000 or 72% for Fiscal 1998 compared to Fiscal 1997 with the biggest
increase coming from sales of RF generators. Specialty power supply revenues,
including revenues from ASTeX CPI, increased by $13,587,000 or 104% for Fiscal
1998 compared to Fiscal 1997 with most of the growth due to the revenues from
ASTeX CPI. The ASTeX CPI and ASTeX Sorbios acquisitions added incremental sales
of $12,686,000 and $3,487,000 respectively compared to Fiscal 1997, or 19% of
total revenue. Without these acquisitions, revenues increased to $65,006,000
from $45,710,000, an increase of 42%.

Research contract revenue declined by $197,000 compared to Fiscal 1997. Other
revenue consisting of service, spare parts and repairs were approximately 6% of
total revenue in Fiscal 1998 and Fiscal 1997.

GROSS PROFIT

Gross profit increased by 63% to $28,450,000 in Fiscal 1998 compared to Fiscal
1997. Gross profit as a percent of total revenue decreased to 34% in Fiscal 1998
compared to 36% in Fiscal 1997, primarily due to the acquisition of ASTeX CPI
whose products have a lower gross margin than other products sold by the
Company. In addition, gross profit margins were impacted by volume declines in
the fourth quarter of Fiscal 1998, resulting in unabsorbed manufacturing costs.
The Company is consolidating


                                       13
<PAGE>   15
several manufacturing facilities in order to improve gross margins and reduce
fixed costs. In the first half of Fiscal 1999, the Company plans to consolidate
its Modesto, California facility into its Woburn, Massachusetts and Colorado
Springs, Colorado sites and its Beverly, Massachusetts facility into Woburn. The
Company expects to record one-time costs for these consolidations in the first
quarter of Fiscal 1999 of up to $1.6 million. The Company continues to seek to
develop and introduce products having higher gross margins and to focus on
improving manufacturing efficiencies and methods to improve gross profit
margins.

SELLING, GENERAL AND ADMINISTRATIVE

Selling expenses increased by 50% to $4,427,000 in Fiscal 1998, but decreased as
a percent of revenue to 5% from 6% in Fiscal 1997. Increased selling expenses
were primarily a result of the acquisitions of ASTeX CPI and ASTeX Sorbios.
General and administrative expenses were flat as a percent of revenue at 8%,
although total general and administrative expenses increased by 68% to
$6,648,000 compared to Fiscal 1997, primarily due to acquisitions.

RESEARCH AND DEVELOPMENT

Net research and development expenses decreased as a percent of sales to 14% in
Fiscal 1998 from 15% in Fiscal 1997. Net research and development expenses
increased by 53% to $11,253,000. Gross spending (total research and development
spending including funded joint development and the direct costs of research
contracts) increased by 42% to $11,605,000. ASTeX has developed and introduced a
number of new technology products including ASTRON for CVD chamber cleaning,
Liquozon for wafer cleaning, RF for HDP-CVD and new laser power supplies for
medical applications. The Company is committed to continued investments in
research and development in order to advance its position as a market and
technological leader.

As a part of the acquisition of ASTeX Sorbios in Fiscal 1998, a valuation
process was performed to establish the fair values of the assets acquired and
liabilities assumed. As part of this process, the Company incurred an expense of
$212,000 for in-process research and development. This compares with
acquisition-related expenses of $1,500,000 incurred with the acquisition of
ASTeX CPI in Fiscal 1997.

OPERATING INCOME

Operating income increased 256% to $5,909,000 or 7% of revenues in Fiscal 1998
compared to Fiscal 1997. Excluding one-time charges for acquisition-related
expenses in both years, operating income increased by $2,963,000 or 94%. The
increase in operating income is a result of increased sales and lower expenses
as a percent of revenue.

OTHER EXPENSES AND INCOME TAXES

Interest expense decreased 66% to $196,000 in Fiscal 1998 compared to Fiscal
1997, while interest income increased by 30% to $514,000 in Fiscal 1998 compared
to Fiscal 1997. The decrease in interest expense and the increase in interest
income is a result of conversion of warrants issued in connection with the
Company's IPO in November 1993. See Footnotes 6 and 11 of the Notes to
Consolidated Financial Statements. Other income increased by $241,000 in Fiscal
1998 compared to Fiscal 1997 due to the sale of an investment in Low Entropy
Systems, Inc., which resulted in a one-time gain of $250,000.

Income tax expense increased to $2,466,000 in Fiscal 1998 compared to $550,000
in Fiscal 1997.

FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996

REVENUES


                                       14
<PAGE>   16
Total revenue increased by 23% for Fiscal 1997 to $47,967,000 compared to Fiscal
1996. This growth was the result of acquisitions as total sales to semiconductor
capital equipment customers were flat due to an industry downturn during the
first three quarters of Fiscal 1997. ASTeX ETO, acquired half-way though Fiscal
1996, provided most of the growth. Sales of specialty RF power sources for
medical applications increased by $7,300,000 in Fiscal 1997 over 1996. The
acquisition of ASTeX CPI, Inc. completed on May 9, 1997 added $2,257,000 of
revenue in Fiscal 1997.

Research contract revenue was approximately 2% of total revenue in both Fiscal
1997 and 1996. Other revenue consisting of service, spare parts and repairs
increased by 48% to $3,050,000 in Fiscal 1997, primarily due to ASTeX ETO which
obtains a larger fraction of its total revenues from this category.

GROSS PROFIT

Gross profit increased by $1,638,000 or 10% in Fiscal 1997 compared to Fiscal
1996. Gross profit as a percent of total revenue decreased from 40% in Fiscal
1996 to 36% in Fiscal 1997, primarily due to the acquisitions of ASTeX ETO and
ASTeX CPI whose products have lower gross margins than other product lines in
the Company. In addition, gross margins were negatively impacted by new product
introduction ramp-up costs, reduced volumes on existing products, and increased
inventory reserves.

SELLING, GENERAL AND ADMINISTRATIVE

Selling expenses decreased by 11% to $2,950,000 in Fiscal 1997 compared to
Fiscal 1996. Selling expenses decreased due to the consolidation of the
Company's semiconductor sales activities and a reduction in headcount,
promotional costs, and travel expenses compared to Fiscal 1996. General and
administrative expenses increased by 4% to $3,958,000 in Fiscal 1997 but
decreased as a percent of sales compared to Fiscal 1996. During Fiscal 1977
there was an additional six months of ASTeX ETO and two months of ASTeX CPI
general and administrative expenses compared to Fiscal 1996. Despite these
additions, cost reductions reduced the overall level of the increase.

RESEARCH AND DEVELOPMENT

Net research and development expenses increased by 46% to $7,343,000 in Fiscal
1997 compared to Fiscal 1996. Gross spending (total research and development
spending including funded joint development and the direct costs of research
contracts) increased by 27% to $8,700,000 in Fiscal 1997 compared to Fiscal
1996. The increased gross spending resulted in significant design wins during
the year and the introduction of three new products at year end.

A valuation process was performed in Fiscal 1997 in order to establish the fair
values of the CPI assets acquired and liabilities assumed. As part of this
process, the Company incurred an expense of $1,500,000 for in-process research
and development. This compares to acquisition-related expenses of $2,888,000
incurred in Fiscal 1996.

OPERATING INCOME

Operating income was $1,659,000 in Fiscal 1997 compared to a loss of $6,078,000
in Fiscal 1996. In the fourth quarter of Fiscal 1996, the Company recorded an
impairment of goodwill in the amount of $6,814,000 associated with the ASTeX ETO
acquisition. See Footnote 15 of the Notes to Consolidated Financial Statements.
Excluding one-time charges for acquisition-related expenses and the write-off of
goodwill, operating income in Fiscal 1997 would have been $3,159,000 or 7% of
total revenue compared to $3,624,000 or 9% of total revenue in Fiscal 1996. The
decrease in adjusted operating income is primarily due to the increased R&D
investment and lower gross margins in Fiscal 1997.

OTHER EXPENSE AND INCOME TAXES

Interest expense in Fiscal 1997 increased by 81% to $585,000 compared to
$324,000 in Fiscal 1996, while interest income in Fiscal 1997 decreased by 40%
to $396,000 compared to $659,000 in Fiscal


                                       15
<PAGE>   17
1996. These changes were the result of the use of cash for the acquisitions of
ASTeX ETO and ASTeX CPI, and increased borrowings to fund these acquisitions.

Income tax expense was $550,000 in Fiscal 1997 compared to $1,541,000 in Fiscal
1996. In Fiscal 1996 the "expected" tax computed by applying the U.S. Federal
corporate income tax rate of 34% to earnings (loss) before income taxes was
increased by $3,378,000 due to one-time charges of goodwill amortization and
write-off and acquisition-related expenses which were not tax deductible. There
were no comparable costs in Fiscal 1997.

FOREIGN CURRENCY FLUCTUATIONS

The Company's foreign revenues are generally denominated in U.S. dollars. The
acquisition of ASTeX Sorbios GmbH increased the risk of foreign currency
fluctuations; however, significant ASTeX Sorbios business is conducted with U.S.
companies in dollars which reduces the foreign exchange fluctuation risk.
Foreign currency fluctuations have not had a significant impact on the
comparison of the results of operations for the periods presented. Over time, as
the Company seeks to expand its operations in Europe and the Far East, more
revenues may be denominated in foreign currencies, increasing the risks
associated with foreign currency fluctuations.

LIQUIDITY AND CAPITAL RESOURCES

At June 27, 1998, the Company had cash and short-term investments of $7,687,000
with working capital of $28,570,000 compared to June 28, 1997, when the company
had cash and long-term investments of $4,546,000 and working capital of
$16,956,000.

Footnote 12 of the Notes to Consolidated Financial Statements contains a summary
of recent acquisitions completed by the Company. These include Sorbios GmbH in
October 1997; CPI in May, 1997; ETO in January 1996; and NES in November 1995.

In November 1993, the Company completed an IPO and received net proceeds of
$15,920,000 through the sale of 2,550,075 shares of common stock at $7.17 per
share and 1,955,000 five-year redeemable warrants at $0.10 per warrant. On
September 3, 1997 the Company announced that it had met the requirements for the
redemption of its redeemable warrants and called the warrants for redemption.
Net proceeds to the Company as a result of the conversion of warrants to common
stock were $15,234,000. The proceeds were used to repay all bank debt, to
complete the ASTeX Sorbios acquisition, and increase working capital. See
Footnote 6 of the Notes to Consolidated Financial Statements.

In October 1995 the Company purchased $250,000 of Series A Convertible Preferred
Stock of Low Entropy Systems, Inc. ("LES"). In August, 1997, the Company sold
all of its shares of LES to Balzers and Leybold U.S. Holding, Inc. for $500,000.

During Fiscal 1998, the Company generated $2,506,000 in net cash flows from
operating activities and used a net $4,908,000 for investing activities. Cash
used for investing activities consisted of $3,683,000 for the acquisition of
Sorbios GmbH, $3,024,000 for additions to property, equipment, and patents,
offset by sales of $1,299,000 in investments (primarily commercial paper and
government treasury bills) and $500,000 from the sale of the Company's
investment in LES. The Company's cash flows from financing activities consisted
primarily of repayment of bank debt for $9,173,000 and proceeds from issuance of
common stock for $16,098,000 which was primarily from the redemption of warrants
and exercise of stock options by employees.

During Fiscal 1997, the Company generated $4,386,000 in net cash flows from
operating activities and used a net $7,018,000 for investing activities. Cash
used for investing activities consisted of $6,483,000 for the acquisition of
ASTeX CPI, $1,087,000 for additions to property, equipment, and patents, and
$1,299,000 for the purchase of investments, offset by $1,991,000 from sales of
investments. Investments are primarily commercial paper and government treasury
bills. The Company's cash flows from financing activities consisted primarily of
proceeds from notes payable of $4,983,000 offset by note repayments of
$4,584,000 and proceeds of $290,000 from issuance of common stock which was


                                       16
<PAGE>   18
primarily due to exercise of employee stock options. The proceeds from notes
payable resulted from additional borrowings for the acquisition of ASTeX CPI,
while the repayments were primarily a result of debt restructuring for the
acquisition.

During Fiscal 1996, the Company generated $719,000 in net cash flows from
operating activities and used a net $7,228,000 for investing activities. Cash
used for investing activities consisted of $12,318,000 for the acquisition of
ASTeX ETO less cash acquired with the acquisitions of ASTeX ETO and ASTeX NES,
$2,895,000 for additions to property, equipment, and patents, $250,000 for the
purchase of an equity investment in LES, and $3,006,000 for the purchase of
investments, offset by sales of $11,242,000 in investments. Investments were
primarily commercial paper and government treasury bills. The Company's cash
flows from financing activities consisted primarily of proceeds from two notes
payable for $8,000,000 used in the acquisition of ASTeX ETO and $1,999,000 from
issuance of common stock which was primarily due to exercise of investor
warrants and exercise of employee stock options, offset by $689,000 of note
repayments.

The Company has a credit facility with State Street Bank and Trust Company which
consists of an $8,000,000 unsecured demand line of credit with interest at the
bank's prime rate. See Footnote 10 of the Notes to Consolidated Financial
Statements. This facility is subject to the Company meeting certain financial
covenants which are tested quarterly. The Company is currently in compliance
with all covenants. There were no outstanding borrowings as of the date of this
report, and as of June 27, 1998 and June 28, 1997. The line of credit expires in
May 2000.

The Company continues to use its cash resources for developing new products,
expanding sales and marketing, performing collaborative product development
projects, and for general working capital. The Company continues to seek joint
ventures and/or acquisitions that will enhance the Company's position in its
markets with the potential to increase revenue growth and profitability. The
Company has issued a letter of intent to acquire certain assets and assume
certain liabilities of a U.S. technology company for approximately $1,800,000 to
be paid in a combination of cash and/or ASTeX stock. This transaction is subject
to adjustment and is expected to be completed in late 1998. The Company has
adequate financial resources to complete this acquisition within its existing
credit facility. See Footnote 17 of the Notes to Consolidated Financial
Statements.

Management believes that existing cash resources, investments, anticipated cash
flows from operations and its credit facility will be sufficient to meet planned
operating expenses and working capital requirements for a period of at least the
next 12 months. The Company may seek to raise additional capital for
acquisitions and for other corporate purposes, although no specific financing is
planned at this time.

NEW ACCOUNTING PRONOUNCEMENTS

In Fiscal 1999 and 2000, the Company will be required to adopt several new
accounting pronouncements. See Footnote 19 of the Notes to Consolidated
Financial Statements.

FACTORS THAT MAY AFFECT FUTURE RESULTS

From time to time, information provided by the Company or statements made by its
employees may contain "forward-looking" information which involve risks and
uncertainties. In particular, statements contained in the Management's
Discussion and Analysis of Financial Condition and Results of Operations which
are not historical facts (including, but not limited to, statements concerning
anticipated operating expense levels, gross margin estimates and the
availability of funds to meet cash requirements) may be "forward-looking"
statements. The Company's actual future results may differ significantly from
those stated in any forward-looking statements. Factors that may cause such
differences include, but are not limited to, the factors discussed below and the
accuracy of the Company's internal estimates of revenue and operating expense
levels.



                                       17
<PAGE>   19
CUSTOMER CONCENTRATION

Relatively few customers account for a substantial portion of the Company's
revenues. Sales to the Company's ten largest customers in Fiscal Years 1998,
1997, 1996 accounted for 72%, 76%, and 77% of revenues, respectively. In Fiscal
Years 1998, 1997, 1996, sales to Applied Materials, the Company's largest
customer in each of these periods, accounted for approximately 40%, 38% and 45%
of the Company's revenues, respectively. The Company expects that sales to
Applied Materials will continue to represent a significant portion of the
Company's revenues for the foreseeable future, although the acquisitions of
ASTeX Sorbios and ASTeX CPI are expected to provide some reduction on the
reliance on Applied Materials. Although a number of the Company's customers do
enter into long-term supply agreements, these agreements typically allow the
customer to cancel orders with limited penalties. A reduction or delay in orders
from Applied Materials or other significant customers, including reductions or
delays due to market, economic or competitive conditions in the semiconductor
industry, could have a material adverse effect on the Company's future financial
condition, revenues and operating results.

DEPENDENCE ON CYCLICAL INDUSTRIES

The Company's business is significantly dependent on capital expenditures by
manufacturers of semiconductors. The semiconductor industry is highly cyclical
and historically has experienced periods of oversupply, resulting in
significantly reduced demands for capital equipment, including the products
manufactured and marketed by the Company. The Company's future financial
condition, revenues and operating results may be materially adversely affected
by semiconductor industry downturns or slowdowns. The semiconductor industry
currently has excess capacity for most types of devices, which has caused
semiconductor manufacturers to significantly decrease their levels of capital
spending. In the personal computer market, a shift in demand from more
expensive, high performance computers to lower-priced models has resulted in
reduced profitability for semiconductor manufacturers, resulting in delays and
further decreases in capital spending. The Company anticipates that at least the
first half of Fiscal 1999 will be adversely affected by the current
semiconductor capital equipment downturn as a result of these factors. The
Company is restructuring its operations, reducing its workforce and
consolidating several facilities to reduce its fixed costs, and will incur
consolidation costs as discussed above under the gross profit comparison of
Fiscal 1998 to 1997. Continued overcapacity in the semiconductor industry and
strengthening demand for lower-priced computers could cause continued weakness
in demand for the Company's products.

RELIANCE ON OEM CUSTOMERS; LENGTHY SALES CYCLE

The Company's products are primarily sold to OEMs which incorporate the
Company's products into their equipment. Due to the significant capital
commitments usually incurred by semiconductor manufacturers in their purchase of
the OEM's equipment, these manufacturers demand highly reliable products which
require as long as several years for OEMs to develop. The Company's revenues are
therefore primarily dependent upon the timing and effectiveness of the efforts
of its OEM customers in developing and marketing equipment incorporating the
Company's products. There can be no assurance that any equipment incorporating
the Company's products will be marketed successfully by the Company's customers.

ASIAN ECONOMIES

Asian countries are having economic difficulties that are causing economic
slowdowns or recessions in those countries. The region does not appear to be
responding to efforts to stimulate its economies. Asia has historically been an
important region for the semiconductor capital equipment industry. If these
economies do not recover in the near future, the recovery in the semiconductor
capital equipment industry may be extended in time or reduced in scale. The
economic difficulties of these countries could also have a negative impact on
the economies of the U.S. and Europe, leading to further declines in demand for
the Company's products.

JAPANESE MARKET

The Japanese semiconductor equipment markets are large and difficult for foreign
companies to penetrate. The Company believes that increasing its penetration of
the Japanese market is important to its


                                       18
<PAGE>   20
business, and that it is currently at a competitive disadvantage to Japanese
suppliers, many of which have long-standing collaborative relationships with
Japanese semiconductor process equipment manufactures. Moreover, the Company's
ability to compete effectively in the Japanese markets may be limited by the
Company's size and its geographic location. Although the Company intends to
expand its direct presence in Japan, there can be no assurance that the Company
will be able to achieve significant sales to, or compete successfully in, Japan.

FOREIGN REVENUES

The Company does business worldwide, both directly and via sales to United
States-based OEMs who sell such products internationally. In Fiscal Years 1998,
1997, and 1996, foreign revenues accounted for 23%, 21% and 19%, respectively,
of the Company's revenues. The Company anticipates that foreign revenues will
continue to account for a significant percentage of revenues, which will result
in a significant portion of the Company's revenues and operating results being
subject to risks associated with foreign revenues, including United States and
foreign regulatory and policy changes, political and economic instability,
difficulties in accounts receivable collection, difficulties in managing
representatives, and foreign currency fluctuations.

HIGHLY COMPETITIVE INDUSTRY

The markets for the Company's products are highly competitive and subject to
rapid technological changes. A number of the Company's current and potential
competitors have substantially greater resources than the Company. There can be
no assurance that the Company will be successful in selling its products to
OEMs, regardless of the performance or the price of the Company's products.
Competitors may develop superior products or products of similar quality at the
same or lower prices. Other technical innovations may impair the Company's
ability to market its products. There can be no assurance that the Company will
be able to compete successfully.

NEW PRODUCTS AND TECHNOLOGICAL CHANGE

The semiconductor manufacturing industry has been characterized by rapid
technological change and evolving industry requirements and standards. The
Company believes that these trends will continue into the foreseeable future.
The Company's success will depend upon its ability to enhance its existing
products and to develop new products that meet customer requirements and achieve
market acceptance. There can be no assurance that the Company will be successful
in introducing products or product enhancements on a timely basis, if at all, or
that the Company will be able to market successfully these products and product
enhancements once developed. Further, there can be no assurance that the
Company's products will not be rendered obsolete by new industry standards or
changing technology.

MANAGEMENT OF GROWTH AND CONSOLIDATION

The Company has recently gone though a period of rapid growth and is now going
through a period of consolidation. Due to the level of technical and marketing
expertise necessary to support its existing and new customers, the Company must
attract and retain highly qualified and well-trained personnel. There can be
only a limited number of persons with the requisite skills to serve in these
positions and it may become increasingly difficult for the Company to hire and
retain such personnel. The Company's expansion and contraction may also
significantly strain the Company's management, manufacturing, financial and
other resources. There can be no assurance that the Company's systems,
procedures, controls and existing space will be adequate to support the
Company's operations. Failure to manage the Company's growth properly could have
a material adverse effect on the Company's future financial condition, revenues
and operating results.

QUARTERLY FLUCTUATIONS IN OPERATING RESULTS AND MARKET PRICE OF SECURITIES

The Company's quarterly operating results may vary significantly from quarter to
quarter depending on factors such as economic conditions in the semiconductor
industry, the timing of significant orders and shipments of its products,
changes and delays in product development, new product introductions by the


                                       19
<PAGE>   21
Company and its competitors, the mix of products sold by the Company and
competitive pricing pressures. Additionally, a number of the Company's microwave
plasma processing and diamond deposition systems have high selling prices. As a
result, quarterly variations in systems sales could significantly affect the
Company's operating results. Moreover, customers may cancel or reschedule
shipments and production difficulties could delay shipments. These factors could
have a material adverse effect on the Company's future financial condition,
revenues and operating results.

The marketing price of the Company's securities could also be subject to wide
fluctuations in response to quarter-to-quarter variations in operating results,
changes in earnings estimates by analysts, market conditions in the
semiconductor industry, as well as general economic conditions and other factors
external to the Company.

EFFECTS OF INFLATION

The Company believes that, over the past three years, inflation has not had a
significant impact on the Company's revenues or operating results.

YEAR 2000 DISCLOSURE

The Company believes that its financial reporting and enterprise resource
planning ("ERP") systems will be Year 2000 compliant by December 1998. The
Company is currently in the process of updating its financial reporting and ERP
systems with SAP R/3, which has been represented as being Year 2000 compliant by
its producer. ASTeX is currently using SAP R/3 in its major facility in Woburn,
MA. The consolidations of AGL and ASTeX CPI into Woburn will remove the
requirement for these locations to implement new software packages. The current
ERP software packages used by ASTeX ETO, Solomon and MAX, are represented as
being Year 2000 compliant. The current software package used by ASTeX Sorbios is
not Year 2000 compliant. The Company intends to purchase an upgrade that is
represented as being Year 2000 compliant and will implement this by December
1998. Other software used by the Company is generally certified by the vendor as
Year 2000 compliant or is not considered critical to the operations of the
Company.

The Company has spent approximately $1,059,000 in Fiscal 1998 on SAP R/3
software, hardware, consultants and internal costs. The Company plans future SAP
R/3 implementation expenditures of approximately $300,000 during the next one to
two years. Although the Company believes its future SAP R/3 implementation cost
estimates to be accurate, the Company can not provide any assurance that these
costs will not increase or that the implementations will occur by the dates
estimated. The source of funds for the Fiscal 1998 expenditures was current
operating cash flows and the Company expects that future operating cash flows
will be the source of funds for these expenditures in the future.

The Company has not yet addressed the Year 2000 preparedness of its critical
suppliers and its major customers and related electronic data interfaces with
these third parties. During the coming year the Company will contact critical
suppliers and major customers to determine whether they are, or will be,
compliant by the Year 2000. The Company expects to complete its assessment by
the end of Fiscal 1999. Based upon this evaluation, the Company will seek new
vendors where necessary and formulate contingency plans to resolve
customer-related issues that may arise. At this time the Company can not
estimate the impact that noncompliant suppliers and customers may have on the
Company or its level of operations in the Year 2000.

Although the Company has not made a systematic review of its products in
operation at customer locations, it believes that a number of diamond deposition
systems may not be Year 2000 compliant. Over the coming year, the Company plans
to identify noncompliant product and offer to make all necessary modifications
to make them compliant. Additional noncompliant products could be identified
during this process. Because a formal identification program has not been
completed, the Company is unable to estimate the cost that will be incurred to
remediate Year 2000 problems related to noncompliant products that are in
operations at customer locations.


                                       20
<PAGE>   22
During the current year the Company will also conduct a review of its
manufacturing equipment and facilities to ensure Year 2000 compliance. Based on
its initial assessment, the Company does not anticipate that a material Year
2000 issue will be discovered in this area.

The Company will also formulate testing and contingency plans that will enable
it to detect and effectively deal with problems that may arise as a result of
Year 2000 noncompliance. Because these reviews and testing have not been 
completed, the Company is unable to estimate the total cost associated with 
addressing the Year 2000, nor what its liabilities to third parties may be as a 
result of Year 2000 issues.

At this time, the Company cannot give any assurance that it will be successful
in completing its planned actions to become Year 2000 compliant on or before the
Year 2000. Additionally, no assurance can be given that instances of
noncompliance which could have a material adverse effect on the Company's
operations or financial condition will be identified; that the systems of other
companies with which the Company transacts business will be corrected on a
timely basis; that a failure by such entities to correct a Year 2000 problem or
a conversion which is incompatible with the Company's systems would not have a
material adverse effect on the Company's operations or financial condition; or
that even if all planned actions are completed, the Company will not experience
some adverse effects from Year 2000 related issues.

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 

   Not Applicable

ITEM 8.    FINANCIAL STATEMENTS

   The following financial statements are filed as part of this report:

                                                                            PAGE

   Independent Auditors' Report                                              F-2

   Consolidated Balance Sheets as of June 27, 1998 and June 28, 1997         F-3

   Consolidated Statements of Operations for the Years Ended
   June 27, 1998, June 28, 1997, and June 29, 1996                           F-4

   Consolidated Statements of Stockholders' Equity for the Years Ended
   June 27, 1998, June 28, 1997, and June 29, 1996                           F-5

   Consolidated Statements of Cash Flows for the Years Ended
   June 27, 1998, June 28, 1997, and June 29, 1996                           F-6

   Notes on Consolidated Financial Statements                                F-8

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

   Not Applicable



                                       21
<PAGE>   23
                                    PART III

ITEM 10.   DIRECTORS AND OFFICERS OF THE REGISTRANT

      The response to this item is incorporated by reference from the 
discussion responsive thereto under the captions "Election of Directors" and 
"Compliance with Section 16(a) of the Securities Exchange Act of 1934" in the 
Company's Proxy Statement for the 1998 Annual Meeting of Stockholders.

ITEM 11.   EXECUTIVE COMPENSATION

      The response to this item is incorporated by reference from the 
discussion responsive thereto under the caption "Executive Compensation" in 
the Company's Proxy Statement for the 1998 Annual Meeting of Stockholders.

ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

      The response to this item is incorporated by reference from the 
discussion responsive thereto under the caption "Beneficial Ownership of 
Common Stock" in the Company's Proxy Statement for the 1998 Annual Meeting of 
Stockholders.

ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      Not applicable

                                    PART IV

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

(a) The following documents are filed as part of this report:

    (1)  FINANCIAL STATEMENTS:

         The list of financial statements required by this item is set forth in
         Item 8 "Consolidated Financial Statements and Supplementary Data" and
         is incorporated herein by reference.

    (2)  FINANCIAL STATEMENT SCHEDULE:

         All schedules are omitted because they are inapplicable, not required,
         or the information is included elsewhere in the Consolidated Financial
         Statements or Notes thereto.

    (3)  EXHIBITS

         (i) The following exhibits are filed herewith or incorporated by 
reference as indicated below: 

EXHIBIT
  NO.                                       TITLE
-------                                     -----

10a       Key Employee Agreement for Jill Maunder, dated as of February 2, 1998.

10b       Key Employee Agreement for Avishay Katz, dated as of May 14, 1998.

21        Revised List of Subsidiaries.

23        Consent of KPMG Peat Marwick LLP.

27        Financial Data Schedule.


         (ii) The following exhibits were filed as part of the Company's Annual 
Report on Form 10-K for the year ended June 28, 1997, filed with the Commission 
on September 26, 1997, and are incorporated herein by reference:

EXHIBIT
  NO.                                       TITLE
-------                                     -----

10a**      1993 Stock Option Plan, as amended.

10b**      Form of Amended Key Employee Agreement for Dr. Richard S. Post, dated
           as of July 1, 1996.

10c**      Form of Amended Key Employee Agreement for Dr. Donald K. Smith, dated
           as of July 1, 1996.

10d**      Form of Amended Key Employee Agreement for John M. Tarrh, dated as of
           July 1, 1996.

10e**      Form of Key Employee Agreement for Brian R. Chisholm, dated November
           26, 1996.

10f**      Form of Key Employee Agreement for Michael DeLuca, dated May 1, 1997.

         (iii) The following exhibits were filed as part of the Company's 
Current Report on Form 8-K filed with the Commission on May 23, 1997, reporting
that the Company acquired substantially all of the assets of Converter Power, 
Inc. and are incorporated herein by reference:

                                       22
<PAGE>   24
EXHIBIT
  NO.                                       TITLE
-------                                     -----

10a        Asset Purchase Agreement, dated as of May 9, 1997 by and among the
           Company, ASTeX/CPI Acquisition Corp., Converter Power, Inc. and ILC
           Technology, Inc.

10b        Assignment and Assumption Agreement, dated as of May 9, 1997, by and
           among ILC Technology, Inc. and ASTeX/CPI Acquisition Corp.

10c        Warranty Bill of Sale dated as of May 9, 1997.

10d        $8,000,000 Unsecured Committed Revolver Loan Agreement between the
           Company and State Street Bank and Trust Company.

10e        $8,000,000 Unsecured Committed Revolver Promissory Note from the
           Company to State Street Bank and Trust Company.

10f        Term Loan Agreement ($4,983,051).

10g        Term Loan Agreement ($4,983,051).

         (iv) The following exhibits were filed as part of the Company's Current
Report on Form 8-K filed with the Commission on December 29, 1995 in connection
with the acquisition of Ehrhorn Technological Operations, Inc., and are 
incorporated herein by reference:


EXHIBIT
  NO.                                       TITLE
-------                                     -----

2          Agreement and Plan of Merger by and among Applied Science and
           Technology, Inc., ASTeX/ETO Acquisition Corp., and Ehrhorn
           Technological Operations, Inc., dated December 29, 1995.

10a        Escrow Agreement among Richard W. Ehrhorn, Tony Christianson, James
           L. Marvin, Applied Science and Technology, Inc., and State Street
           Bank and Trust Company, dated December 29, 1995.

10c        Supplemental Indemnification Agreement by and among Applied Science
           and Technology, Inc. and Certain Principal Stockholders of Ehrhorn
           Technological Operations, Inc., dated December 29, 1995.


         (v) The following exhibit was filed as part of the Company's Annual
Report on Form 10-K for the year ended July 1, 1995, filed with the Commission 
on September 28, 1995, and is incorporated herein by reference:


EXHIBIT
  NO.                                       TITLE
-------                                     -----

10l(3)     Extension to the Massachusetts lease, dated June 23, 1995.


         (vi) The following exhibits were filed as part of the Company's 
Form SB-2 Registration Statement (Number 33-69098-B) declared effective by the
Commission on November 9, 1993, and are incorporated by reference herein:


                                       23
<PAGE>   25
EXHIBIT
  NO.                                       TITLE
-------                                     -----

3a         Certificate of Incorporation, as amended, dated July 1, 1992.

3b         Certificate of Amendment of Certificate of Incorporation, dated
           September 1, 1993.

3c         Bylaws, as amended.

4a         Specimen Common Stock Certificate.

4b         Form of Warrant Agreement, including Form of Warrant Certificate.

4c         Form of Representative's Warrant Agreement, including Form of
           Representative's Warrant Certificate.

+10a       Master Purchase Order and Sales Agreement between the Company and
           Applied Materials, Inc., dated May 28, 1993, (the "Applied
           Agreement"). Attached as Appendix A to the Applied Agreement is an
           Intellectual Property Agreement by and between the Company and
           Applied Materials, Inc.

10f        Form of Consulting Agreement between the Company and Outside
           Consultants.

10g        Form of Employee Agreement between the Company and Non-executive
           Employees.

10h        Form of Employment Agreement between ASTeX/Gerling and Non-executive
           Employees.

10k        Form of Confidentiality Agreement between the Company and Customers,
           Suppliers and Vendors.

101(1)     Lease for premises at 35 Cabot Road, Woburn, Massachusetts, dated
           February 10, 1989, (the "Massachusetts Lease").

10m        Lease for the premises at 1132 Doker Drive, Modesto, California,
           dated January 31, 1992.

10n**      1987 Stock Option Plan.

+10t       Purchase Agreement by and between the Company and GaSonics
           Corporation, dated September 24, 1993.

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

+   Certain information withheld and filed separately with the Commission
pursuant to a request for confidential treatment.

**  These exhibits relate to executive compensation plans and arrangements
required to be filed as an exhibit to this form pursuant to Item 14(c) of
Form 10-K.

(b) Reports on Form 8-K. No reports on Form 8-K were filed during the last 
quarter of the fiscal year ended June 27, 1998.

(c) Exhibits. The Company hereby files as exhibits to this Annual Report on
Form 10-K those exhibits listed in Item 14(a)(3) above.

(d) Financial Statement Schedules. See Item 14(a)(2) above.



                                       24
<PAGE>   26
                                   SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

                                            APPLIED SCIENCE AND TECHNOLOGY, INC.


Date: September 25, 1998                    By: /s/ Richard S. Post
                                                --------------------------------
                                                Richard S. Post
                                                President


In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.

Name                       Capacity                           Date
----                       --------                           ----


/s/ Richard S. Post        Chairman of the Board, Chief       September 25, 1998
------------------------   Executive Officer and President
Richard S. Post            (principal executive officer)


/s/ John M. Tarrh          Chief Financial Officer, Senior    September 25, 1998
------------------------   Vice President of Finance
John M. Tarrh              (principal financial and accounting
                           officer) and Director


/s/ Donald K. Smith        Director                           September 25, 1998
------------------------
Donald K. Smith


/s/ John R. Bertucci       Director                           September 25, 1998
------------------------
John R. Bertucci


/s/ Michel de Beaumont     Director                           September 25, 1998
------------------------
Michel de Beaumont


/s/ Robert R. Anderson     Director                           September 25, 1998
------------------------
Robert R. Anderson


/s/ Hans-Jochen Kahl       Director                           September 25, 1998
------------------------
Hans-Jochen Kahl


                                       25
<PAGE>   27





              APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES

                        Consolidated Financial Statements

                         June 27, 1998 and June 28, 1997


                   (With Independent Auditors' Report Thereon)


















                                      F-1
<PAGE>   28
                          INDEPENDENT AUDITORS' REPORT


The Board of Directors and Stockholders
Applied Science and Technology, Inc.:

We have audited the accompanying consolidated balance sheets of Applied Science
and Technology, Inc. and subsidiaries as of June 27, 1998 and June 28, 1997, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the years in the three-year period ended June 27, 1998.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Applied Science and
Technology, Inc. and subsidiaries as of June 27, 1998 and June 28, 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended June 27, 1998, in conformity with generally accepted
accounting principles.





KPMG Peat Marwick LLP





Boston, Massachusetts
July 25, 1998




                                      F-2
<PAGE>   29
              APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES

                           Consolidated Balance Sheets

<TABLE>
<CAPTION>
                                                        JUNE 27,       JUNE 28,
                                                          1998           1997
                                                      ------------   ------------
<S>                                                   <C>            <C>
                                  ASSETS
Current assets:
  Cash and cash equivalents                           $  7,686,805   $  3,246,337
  Trade receivables, net (notes 2, 3 and 9)             12,734,381     11,915,919
  Inventories (note 4)                                  13,737,212     10,013,422
  Prepaid expenses and other assets                        548,709        276,682
  Deferred income taxes (note 7)                         1,356,044        895,237
                                                      ------------   ------------
             Total current assets                       36,063,151     26,347,597
                                                      ------------   ------------

Property and equipment:
  Land                                                     473,000        473,000
  Building                                               1,643,072      1,621,469
  Equipment                                             11,107,731      7,871,718
  Furniture and fixtures                                 1,032,497        741,143
  Leasehold improvements                                 2,228,246      1,946,800
                                                      ------------   ------------
                                                        16,484,546     12,654,130
  Less accumulated depreciation and amortization        (7,960,282)    (5,150,881)
                                                      ------------   ------------
             Net property and equipment                  8,524,264      7,503,249
                                                      ------------   ------------

Other assets:
  Patents, net                                           1,095,090        148,794
  Goodwill, net of accumulated amortization of
    $471,252 and $55,282 in 1998 and 1997, 
    respectively (notes 12 and 15)                       4,042,031      3,261,652
  Long-term investments                                         --      1,299,545
  Deferred income taxes (note 7)                         1,099,998             --
  Notes receivable, less current maturities
    (notes 3 and 13)                                       468,772        383,080
  Other, net                                                    --        383,304
                                                      ------------   ------------
             Total other assets                          6,705,891      5,476,375
                                                      ------------   ------------

                                                      $ 51,293,306   $ 39,327,221
                                                      ============   ============

                 LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Current maturities of long-term debt (note 11)      $         --   $  1,824,397
  Accounts payable                                       3,011,798      3,869,521
  Accrued expenses                                       1,935,229      1,374,635
  Accrued compensation expense and related costs         1,993,027      1,448,928
  Accrued income taxes                                     293,444        647,142
  Commissions payable and customer advances                259,154        226,672
                                                      ------------   ------------
             Total current liabilities                   7,492,652      9,391,295
                                                      ------------   ------------

Long-term debt, less current maturities (note 11)               --      6,368,913
Deferred income taxes (note 7)                                  --         78,003
                                                      ------------   ------------
             Total liabilities                           7,492,652     15,838,211
                                                      ------------   ------------

Commitments and contingencies (notes 5, 10 and 17)

Stockholders' equity (notes 6 and 12):
  Common stock                                              86,065         67,785
  Additional paid-in capital                            44,193,116     27,837,250
  Accumulated deficit                                     (247,095)    (4,267,699)
  Less: Notes receivable for common stock purchases       (148,326)      (148,326)
  Cumulative translation adjustment                        (83,106)            --
                                                      ------------   ------------
             Total stockholders' equity                 43,800,654     23,489,010
                                                      ------------   ------------

                                                      $ 51,293,306   $ 39,327,221
                                                      ============   ============
</TABLE>

See accompanying notes to consolidated financial statements.



                                      F-3
<PAGE>   30
              APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES

                      Consolidated Statements of Operations

<TABLE>
<CAPTION>
                                                                          YEARS ENDED
                                                          -------------------------------------------
                                                            JUNE 27,        JUNE 28,        JUNE 29,
                                                              1998            1997            1996
                                                          -----------     -----------     -----------
<S>                                                       <C>             <C>             <C>

Product sales, net                                        $77,958,080     $43,934,476     $36,175,388
Research contract revenue                                     785,607         982,383         894,517
Other revenue                                               4,692,448       3,050,279       2,065,691
                                                          -----------     -----------     -----------
            Total revenue (note 9)                         83,436,135      47,967,138      39,135,596
                                                          -----------     -----------     -----------

Cost of sales and revenue:
     Product sales and other revenues                      54,563,883      30,052,877      22,924,311
     Research contracts                                       422,724         504,357         439,659
                                                          -----------     -----------     -----------
            Total cost of sales and revenue                54,986,607      30,557,234      23,363,970
                                                          -----------     -----------     -----------
            Gross profit                                   28,449,528      17,409,904      15,771,626
                                                          -----------     -----------     -----------

Operating expenses:
     Selling expenses                                       4,426,521       2,950,117       3,297,664
     General and administrative expenses                    6,648,055       3,957,792       3,807,327
     Research and development expenses, net (note 1)       11,253,490       7,343,190       5,043,189
     Acquisition-related expenses (note 12)                   212,423       1,500,000       2,887,647
     Write-off of goodwill (note 15)                               --              --       6,813,562
                                                          -----------     -----------     -----------
            Total operating expenses                       22,540,489      15,751,099      21,849,389
                                                          -----------     -----------     -----------
            Earnings (loss) from operations                 5,909,039       1,658,805      (6,077,763)
                                                          -----------     -----------     -----------

Other expense (income):
     Interest expense                                         196,392         585,462         323,510
     Interest income                                         (514,363)       (396,114)       (659,066)
     Other expense (income)                                  (259,594)        (18,302)         13,568
                                                          -----------     -----------     -----------
            Total other expense (income)                     (577,565)        171,046        (321,988)
                                                          -----------     -----------     -----------
            Earnings (loss) before income taxes             6,486,604       1,487,759      (5,755,775)

Income tax expense (note 7)                                 2,466,000         550,000       1,541,000
                                                          -----------     -----------     -----------
            Net earnings (loss)                           $ 4,020,604     $   937,759     $(7,296,775)
                                                          ===========     ===========     ===========

Basic earnings (loss) per share                           $      0.50     $      0.14     $     (1.16)
                                                          ===========     ===========     ===========

Diluted earnings (loss) per share                         $      0.47     $      0.14     $     (1.16)
                                                          ===========     ===========     ===========

Weighted average common shares outstanding used to
     calculate basic earnings (loss) per share              8,052,926       6,686,253       6,307,146
                                                          ===========     ===========     ===========

Weighted average common shares outstanding used to
     calculate fully diluted earnings (loss) per share      8,528,947       6,777,440       6,307,146
                                                          ===========     ===========     ===========
</TABLE>


See accompanying notes to consolidated financial statements.



                                      F-4
<PAGE>   31
              APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES

                 Consolidated Statements of Stockholders' Equity

           Years ended June 27, 1998, June 28, 1997 and June 29, 1996


<TABLE>
<CAPTION>
                                                                                                                 RETAINED
                                                       PREFERRED STOCK       COMMON STOCK        ADDITIONAL      EARNINGS
                                                       ---------------   --------------------      PAID-IN     (ACCUMULATED
                                                       SHARES   AMOUNT     SHARES     AMOUNT       CAPITAL       DEFICIT)
                                                       ------   ------   ----------  --------   ------------   ------------
<S>                                                    <C>      <C>      <C>         <C>        <C>            <C>

Balance at July 1, 1995                                    --   $   --   6,545,591   $65,456    $21,258,110    $ 2,091,317
     Retirement of treasury stock                          --       --    (760,460)   (7,604)    (1,439,015)            --
     Repayment of notes receivable                         --       --          --        --             --             --
     Issuance of notes receivable                          --       --      27,000       270        236,480             --
     Exercise of stock options and warrants                --       --     350,381     3,504      1,995,229             --
     Tax benefit of stock options exercised                --       --          --        --        284,101             --
     Stock issued in connection with
        acquisitions (note 12)                             --       --     510,051     5,100      4,332,961             --
     Net loss                                              --       --          --        --             --     (7,296,775)
                                                       ------   ------   ---------   -------    -----------    -----------

Balance at June 29, 1996                                   --       --   6,672,563    66,726     26,667,866     (5,205,458)
     Repayment of notes receivable                         --       --          --        --             --             --
     Canceled stock in exchange for
        cancelation of note receivable                     --       --      (7,500)      (75)       (77,425)            --
     Exercise of stock options                             --       --      52,964       530        289,146             --
     Tax benefit of stock options exercised                --       --          --        --         62,242             --
     Stock issued in connection with
        acquisition (note 12)                              --       --      60,482       604        895,421             --
     Net earnings                                          --       --          --        --             --        937,759
                                                       ------   ------   ---------   -------    -----------    -----------

Balance at June 28, 1997                                   --       --   6,778,509    67,785     27,837,250     (4,267,699)
     Exercise of stock options and warrants (note 6)       --       --   1,827,954    18,280     16,079,566             --
     Tax benefit of stock options exercised                --       --          --        --        276,300             --
     Cumulative translation adjustment                     --       --          --        --             --             --
     Net earnings                                          --       --          --        --             --      4,020,604
                                                       ------   ------   ---------   -------    -----------    -----------

Balance at June 27, 1998                                   --   $   --   8,606,463   $86,065    $44,193,116    $  (247,095)
                                                       ======   ======   =========   =======    ===========    ===========


                                                                                      NOTES
                                                            TREASURY STOCK        RECEIVABLE FOR    CUMULATIVE       TOTAL
                                                       ------------------------    COMMON STOCK    TRANSLATION   STOCKHOLDERS'
                                                         SHARES       AMOUNT        PURCHASES       ADJUSTMENT      EQUITY
                                                       ---------   ------------   --------------   -----------   -------------
<S>                                                    <C>         <C>            <C>              <C>           <C>

Balance at July 1, 1995                                 760,460    $(1,446,619)     $ (74,500)      $     --     $21,893,764
     Retirement of treasury stock                      (760,460)     1,446,619             --             --              --
     Repayment of notes receivable                           --             --         77,924             --          77,924
     Issuance of notes receivable                            --             --       (236,750)            --              --
     Exercise of stock options and warrants                  --             --             --             --       1,998,733
     Tax benefit of stock options exercised                  --             --             --             --         284,101
     Stock issued in connection with
        acquisitions (note 12)                               --             --             --             --       4,338,061
     Net loss                                                --             --             --             --      (7,296,775)
                                                       --------    -----------   ------------       --------     -----------

Balance at June 29, 1996                                     --             --       (233,326)            --      21,295,808
     Repayment of notes receivable                           --             --          7,500             --           7,500
     Canceled stock in exchange for
        cancelation of note receivable                       --             --         77,500             --              --
     Exercise of stock options                               --             --             --             --         289,676
     Tax benefit of stock options exercised                  --             --             --             --          62,242
     Stock issued in connection with
        acquisition (note 12)                                --             --             --             --         896,025
     Net earnings                                            --             --             --             --         937,759
                                                       --------    -----------   ------------       --------     -----------

Balance at June 28, 1997                                     --             --       (148,326)            --      23,489,010
     Exercise of stock options and warrants (note 6)         --             --             --             --      16,097,846
     Tax benefit of stock options exercised                  --             --             --             --         276,300
     Cumulative translation adjustment                       --             --             --        (83,106)        (83,106)
     Net earnings                                            --             --             --             --       4,020,604
                                                       --------    -----------   ------------       --------     -----------

Balance at June 27, 1998                                     --    $        --      $(148,326)      $(83,106)    $43,800,654
                                                       ========    ===========   ============       ========     ===========
</TABLE>


See accompanying notes to consolidated financial statements.



                                      F-5
<PAGE>   32
              APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES

                      Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                        YEARS ENDED
                                                        -------------------------------------------
                                                          JUNE 27,        JUNE 28,       JUNE 29,
                                                            1998            1997           1996
                                                        ------------    -----------    ------------
<S>                                                     <C>             <C>            <C>

Cash flows from operating activities:
  Net earnings (loss)                                   $  4,020,604    $   937,759    $ (7,296,775)
  Adjustments to reconcile net earnings (loss) to
    net cash provided by operating activities:
      Depreciation                                         2,194,319      1,824,739       1,335,634
      Amortization and goodwill write-off                    548,390        117,164       7,129,418
      Acquisition-related expenses                           212,423      1,500,000       2,203,000
      Deferred income taxes                                   37,000       (439,000)       (143,000)
      Gain on sale of assets                                (191,842)            --              --
      Equipment transferred to inventories                        --        114,419              --
      Changes in assets and liabilities:
        Trade receivables                                     44,702     (1,739,367)     (1,112,739)
        Inventories                                       (2,754,271)       146,391      (1,117,125)
        Prepaid expenses and other assets                   (271,853)        41,036         474,325
        Notes receivable                                     231,617        373,304         154,524
        Accounts payable                                  (1,896,906)       785,299         (76,810)
        Accrued expenses                                     409,675        188,022      (1,060,162)
        Accrued income taxes                                 (77,398)       536,205         228,445
                                                        ------------    -----------    ------------
         Net cash provided by operating activities         2,506,460      4,385,971         718,735
                                                        ------------    -----------    ------------

Cash flows from investing activities:
  Acquisitions of subsidiaries, less cash acquired        (3,682,639)    (6,482,933)    (12,318,331)
  Purchases of investments                                      (339)    (1,299,102)     (3,006,211)
  Proceeds from sales of investments                       1,799,545      1,990,519      11,241,904
  Additions to property and equipment                     (2,999,148)    (1,029,908)     (2,812,968)
  Patent costs                                               (24,943)       (57,005)        (81,974)
  Investment in other assets                                      --       (139,827)       (250,000)
                                                        ------------    -----------    ------------
         Net cash used for investing activities           (4,907,524)    (7,018,256)     (7,227,580)
                                                        ------------    -----------    ------------

Cash flows from financing activities:
  Proceeds from notes payable                                     --      4,983,050       8,000,000
  Repayments of notes payable                             (9,173,208)    (4,583,898)       (689,163)
  Repayment of notes receivable for common
    stock purchases                                               --          7,500          77,924
  Net proceeds from issuance of common stock              16,097,846        289,676       1,998,733
                                                        ------------    -----------    ------------
         Net cash provided by financing activities         6,924,638        696,328       9,387,494
                                                        ------------    -----------    ------------

Effect of exchange rates on cash                             (83,106)            --              --
                                                        ------------    -----------    ------------

Net increase (decrease) in cash and cash equivalents       4,440,468     (1,935,957)      2,878,649

Cash and cash equivalents at beginning of year             3,246,337      5,182,294       2,303,645
                                                        ------------    -----------    ------------

Cash and cash equivalents at end of year                $  7,686,805    $ 3,246,337    $  5,182,294
                                                        ============    ===========    ============
</TABLE>



                                                                     (Continued)

                                      F-6

<PAGE>   33
              APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES

                      Consolidated Statements of Cash Flows


<TABLE>
<CAPTION>
                                                                    YEARS ENDED
                                                    -------------------------------------------
                                                      JUNE 27,        JUNE 28,       JUNE 29,
                                                        1998            1997           1996
                                                    ------------    -----------    ------------
<S>                                                 <C>             <C>            <C>

Supplemental disclosures of cash flow information:
  Cash paid during the year for:
    Interest                                        $    249,044    $   538,893    $    276,347
                                                    ============    ===========    ============
    Income taxes                                    $  2,520,921    $   453,567    $  1,470,555
                                                    ============    ===========    ============

Acquisitions:
  Assets acquired                                      4,700,575      4,074,488      12,145,829
  Acquisition related expenses, net of
    tax benefit                                          212,423        945,000       2,203,000
  Goodwill and other intangible assets                 2,177,479      3,316,934       7,048,512
  Liabilities assumed                                 (3,407,838)      (957,464)     (4,459,280)
  Common stock issued                                         --       (896,025)     (4,338,061)
                                                    ------------    -----------    ------------
    Cash paid                                          3,682,639      6,482,933      12,600,000
  Less cash acquired                                          --             --        (281,669)
                                                    ------------    -----------    ------------

         Net cash paid for acquisitions             $  3,682,639    $ 6,482,933    $ 12,318,331
                                                    ============    ===========    ============
</TABLE>


See accompanying notes to consolidated financial statements.



                                      F-7

<PAGE>   34
              APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                         June 27, 1998 and June 28, 1997



(1)     NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

        (a)     NATURE OF BUSINESS

                Applied Science and Technology, Inc. (the "Company") develops
                and manufactures equipment using plasma and power generation
                technologies for semiconductor, medical and industrial
                production applications. The Company commenced operations in
                January 1987.

        (b)     PRINCIPLES OF CONSOLIDATION

                The consolidated financial statements include the accounts of
                the Company and its wholly owned subsidiaries: Applied Science
                and Technology ("ASTeX"), GmbH, ASTeX/Gerling Laboratories,
                Inc., ETO, Inc. ("ETO"), ASTeX CPI, Inc. ("CPI"), Newton
                Engineering Service, Inc. ("NES") and ASTeX Sorbios GmbH. All
                significant intercompany balances and transactions have been
                eliminated in consolidation.

        (c)     REVENUE RECOGNITION

                The Company recognizes revenue on product sales and other sales
                when the related products are shipped or the related services
                are rendered. The Company periodically enters into research
                contracts which generally provide for nonrefundable payments.
                Research contract revenue is recognized based on the proportion
                of costs incurred to total estimated costs using the percentage
                of completion method. At the time a loss on a contract becomes
                known, the entire amount of the estimated loss is recognized.

        (d)     CASH EQUIVALENTS

                For purposes of the consolidated statements of cash flows, the
                Company considers all highly liquid investments with original
                maturities of three months or less to be cash equivalents.

        (e)     INVESTMENTS

                Cash equivalents and long-term investments consist of U.S.
                treasury notes and money market funds at June 27, 1998 and June
                28, 1997. The Company uses an investment firm to manage its
                investment portfolio.

                The Company classifies its securities as held-to-maturity.
                Held-to-maturity securities are those investments in which the
                Company has the ability and intent to hold the security until
                maturity. Held-to-maturity securities are recorded at amortized
                cost, which approximates market value.

                Dividend and interest income is recognized in the period earned.
                Realized gains and losses for held-to-maturity securities are
                included in earnings and are derived using the specific
                identification method for determining the cost of securities
                sold.




                                      F-8
<PAGE>   35
              APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                         June 27, 1998 and June 28, 1997



        (f)     INVENTORIES

                Inventories are stated at the lower of cost or market. Cost is
                determined using the first-in, first-out (FIFO) method.

        (g)     PROPERTY AND EQUIPMENT

                Property and equipment are stated at cost and depreciated using
                the straight-line method over the estimated useful lives of the
                assets for financial statement purposes and accelerated methods
                for income tax purposes. The estimated useful lives of fixed
                assets are as follows:

                   Building                              25 to 31-1/2 years
                   Equipment, furniture and fixtures     3-1/2 to 7 years
                   Leasehold improvements                Remaining lease term

        (h)     PATENTS

                Patent costs are amortized over their estimated useful life of
                five years.

        (i)     GOODWILL

                Goodwill is amortized over 10 years. The Company continually
                evaluates whether events or circumstances have occurred that
                indicate that the remaining useful life of goodwill may warrant
                revision or that the remaining balance may not be recoverable.
                When factors indicate that goodwill should be evaluated for
                possible impairment, the Company estimates the undiscounted cash
                flow of the business segment, net of tax, over the remaining
                life of the asset in determining whether the asset is
                recoverable. Charges for impairment of goodwill would be
                recorded to the extent unamortized book value exceeds the
                related future discounted cash flow, net of tax. The discount
                factor to be used would be the long-term debt rate currently
                obtainable by the Company. During fiscal 1996, $6,813,562 of
                goodwill was written off (see note 15).

        (j)     RESEARCH AND DEVELOPMENT COSTS

                All research and development costs are expensed as incurred.
                Research and development expenses attributable to research
                contracts are included in costs of sales and revenue.




                                      F-9
<PAGE>   36
              APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                         June 27, 1998 and June 28, 1997



                The Company also receives funding for certain research and
                development costs which is used to offset its research and
                development expenses. The Company incurred research and
                development expenses, net of funding received, as follows:

<TABLE>
<CAPTION>
                                                             YEARS ENDED
                                                 -----------------------------------
                                                   JUNE 27,    JUNE 28,    JUNE 29,
                                                     1998        1997        1996
                                                 -----------  ----------  ----------
<S>                                              <C>          <C>         <C>

                Research and development costs   $11,605,103  $8,195,367  $6,429,083
                Less funding                         351,613     852,177   1,385,894
                                                 -----------  ----------  ----------
                  Net research and development
                   expenses                      $11,253,490  $7,343,190  $5,043,189
                                                 ===========  ==========  ==========
</TABLE>

        (k)     INCOME TAXES

                The Company's income taxes are accounted for under the asset and
                liability method. Under this method, deferred tax assets and
                liabilities are recognized for the estimated future tax
                consequences attributable to differences between the financial
                statement carrying amounts of existing assets and liabilities
                and their respective tax bases. Deferred tax assets and
                liabilities are measured using enacted tax rates in effect for
                the year in which those temporary differences are expected to be
                recovered or settled. The effect on deferred tax assets and
                liabilities of a change in tax rates is recognized in income in
                the period that includes the enactment date.

        (l)     EARNINGS (LOSS) PER SHARE

                In June 1998, the Company adopted Financial Accounting Standards
                Board Statement No. 128, Earnings Per Share ("SFAS 128"). All
                Previously reported earnings per share have been restated to
                reflect the provisions of SFAS 128.

        (m)     USE OF ESTIMATES

                Management of the Company has made a number of estimates and
                assumptions that affect the reported amounts of assets and
                liabilities and the disclosure of contingent assets and
                liabilities at the date of the financial statements and the
                reported amounts of revenues and expenses during the reporting
                period. Actual results could differ from those estimates.

                The significant estimates included in the consolidated financial
                statements relate to the determination of the carrying value of
                goodwill and reserves for excess inventories. Management
                determined the 1996 impairment of goodwill based upon the
                expected future cash flows of ETO and the terminal value of ETO
                at the end of the remaining useful life of the goodwill.
                Management estimated expected future cash flows of ETO through
                the use of sales projections and estimated operating and capital
                expenditures over the remaining useful




                                      F-10
<PAGE>   37
              APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                         June 27, 1998 and June 28, 1997



                life of the goodwill. Management establishes its reserves for
                excess inventories based upon expected future usage and sales of
                inventories in the normal course of business as adjusted for
                anticipated changes in market demand. Certain of the Company's
                inventories are product specific and may not be readily salable
                in the open market. The possible loss of sales to certain
                customers could result in the need for further adjustment to the
                carrying value of the Company's inventories.

        (n)     FAIR VALUE OF FINANCIAL INSTRUMENTS

                Statement of Financial Accounting Standards No. 107, Disclosures
                about Fair Value of Financial Instruments, defines the fair
                value of a financial instrument as the amount at which the
                instrument could be exchanged in a current transaction between
                willing parties.

                The carrying amounts of cash and cash equivalents, trade
                receivables, prepaid expenses and other assets, accounts
                payable, and accrued expenses approximate fair value because of
                the short maturity of those instruments.

                The carrying amounts of long-term investments approximate fair
                value based on quoted market prices.

                The carrying amounts of notes receivable and long-term debt
                approximate fair value as the rates of interest on these
                instruments approximate current market rates of interest for
                similar instruments with comparable maturities.

        (o)     ACCOUNTING FOR STOCK-BASED COMPENSATION

                In October 1995, the Financial Accounting Standards Board issued
                Statement No. 123, Accounting for Stock-Based Compensation
                ("Statement 123") which established a fair-value based method of
                accounting for stock-based compensation plans. Prior to its
                adoption of Statement 123, the Company accounted for employee
                stock options under APB Opinion No. 25, Accounting for Stock
                Issued to Employees, which required the use of an
                intrinsic-value method of accounting for stock options.
                Statement 123 allows the continued use of the intrinsic-value
                method of accounting prescribed by APB Opinion No. 25 as long as
                pro forma disclosures of net earnings (loss) and net earnings
                (loss) per share, as if the fair-value method of accounting for
                stock options were applied, are presented.

                The Company has adopted Statement 123 and has elected to
                continue to account for stock options using the methodology
                prescribed by APB Opinion No. 25. Accordingly, pro forma
                disclosures of net earnings (loss) and net earnings (loss) per
                share as if the fair-value method of accounting for stock
                options were applied are presented in note 6.

        (p)     FOREIGN CURRENCY TRANSLATION

                All assets and liabilities of the Company's foreign operations
                are translated into U.S. dollars using year-end exchange rates.
                All revenue and expense items are translated using
                weighted-average exchange rates for the year. Translation gains
                and losses are included as a separate component of stockholders'
                equity.




                                      F-11
<PAGE>   38
              APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                         June 27, 1998 and June 28, 1997



(2)     TRADE AND NOTES RECEIVABLE

        Trade and notes receivable consist of the following:

<TABLE>
<CAPTION>
                                                           JUNE 27,        JUNE 28,
                                                             1998            1997
                                                         ------------     -----------
<S>                                                      <C>              <C>
        Trade receivables                                $13,044,466      $11,857,598
        Notes receivable, current portion (see note 3)        67,354          384,663
        Allowance for doubtful accounts                     (377,439)        (326,342)
                                                          ----------      -----------
                                                         $12,734,381      $11,915,919
                                                          ==========      ===========
</TABLE>


(3)     NOTES RECEIVABLE

        Notes receivable consist of the following:

<TABLE>
<CAPTION>
                                                           JUNE 27,        JUNE 28,
                                                             1998            1997
                                                         ------------     -----------
<S>                                                      <C>              <C>
        Note receivable from stockholder with interest
         at 8% per annum, payable in principal
         installments of $59,651 due through June,
         1999 with the remaining balance of $228,684
         due in August, 1999. The note is secured by
         certificates of deposit.                        $   288,335      $   565,022

        Notereceivable with interest at 8% per annum,
         payable in monthly installments of $2,327,
         including interest, with any remaining
         balance due on December 2, 2002. The note is
         secured by real estate.                             147,791          160,181

        Unsecured note receivable paid in 1998                    --           42,540

        Unsecured note receivable with interest at 10%       100,000               --
                                                          ----------      -----------
                                                             536,126          767,743
         Less current maturities                              67,354          384,663
                                                          ----------      -----------

             Long-term notes receivable                   $  468,772      $   383,080
                                                          ==========      ===========
</TABLE>

        Current maturities of notes receivable have been included in trade
        receivables.




                                      F-12
<PAGE>   39
              APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                         June 27, 1998 and June 28, 1997



(4)     INVENTORIES

        Inventories consist of the following:

<TABLE>
<CAPTION>
                                                  JUNE 27,         JUNE 28,
                                                    1998             1997
                                                ------------     ------------
<S>                                             <C>              <C>

        Raw materials                            $ 8,990,201      $ 6,566,718
        Work in process                            3,210,131        2,534,245
        Finished goods                             1,536,880          912,459
                                                 -----------      -----------

                                                 $13,737,212      $10,013,422
                                                 ===========      ===========
</TABLE>


(5)     LEASES

        The Company leases office, research and manufacturing facilities under
        operating leases which expire through June, 2001. Future minimum lease
        payments under operating leases are as follows:

        Year ending June 30:
            1999                                 $1,131,933
            2000                                    982,285
            2001                                    285,253
                                                 ----------
                                                 $2,399,471
                                                 ==========

        Rent expense totaled $916,155, $761,710 and $548,259 for the years
        ended June 27, 1998, June 28, 1997 and June 29, 1996, respectively.

(6)     STOCKHOLDERS' EQUITY

        Capital stock consists of the following at June 27, 1998 and June 28,
        1997:

<TABLE>
<CAPTION>
                                                             NUMBER OF SHARES
                                                          ISSUED AND OUTSTANDING
                                                         -----------------------
                                                          JUNE 27,     JUNE 28,
                                            AUTHORIZED      1998         1997
                                           -----------   ----------   ----------
<S>                                        <C>           <C>          <C>

        Preferred stock:
          Preferred stock, $.01 par value  $ 1,000,000   $       --   $       --
                                           -----------   ----------   ----------
                 Total preferred stock       1,000,000           --           --
                                           -----------   ----------   ----------

        Common stock:
          Common stock, $.01 par value      30,000,000    8,606,463    6,778,509
                                           -----------   ----------   ----------
                 Total common stock         30,000,000    8,606,463    6,778,509
                                           -----------   ----------   ----------

                 Total capital stock       $31,000,000   $8,606,463   $6,778,509
                                           ===========   ==========   ==========
</TABLE>




                                      F-13
<PAGE>   40
              APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                         June 27, 1998 and June 28, 1997


        The holders of common stock are entitled to one vote for each share of
        record held on each matter submitted to a vote of stockholders. There is
        no cumulative voting for election of directors. Subject to the prior
        rights of any series of preferred stock which may from time to time be
        outstanding, holders of common stock are entitled to receive ratably
        such dividends as may be declared by the board of directors out of funds
        legally available therefrom, and, upon the liquidation, dissolution or
        winding up of the Company, are entitled to share ratably in all assets
        remaining after payment of liabilities and payment of accrued dividends
        and liquidation preference on the preferred stock, if any. Holders of
        common stock have no preemptive rights and have no rights to convert
        their common stock into any other securities. The outstanding common
        stock is validly issued and nonassessable.

        On November 26, 1997, the Company announced a 3 for 2 stock split of its
        common stock, which was distributed to stockholders in the form of a
        stock dividend on December 12, 1997. All prior-year stock amounts have
        been adjusted to reflect the stock split.

        On February 19, 1998, the Company declared a dividend of one preferred
        share purchase right (a "right") for each outstanding share of common
        stock outstanding on March 2, 1998 (the "record date") to stockholders
        of record on that date. Each right entitles the registered holder to
        purchase one one-thousandth of a share of Series A Junior Participating
        Preferred Stock, par value $0.01 per share ("junior preferred shares"),
        of the Company at $70 per one one-thousandth of a junior preferred
        share, subject to adjustment in the event of a stock split of the common
        shares or a stock dividend on the common shares payable in common shares
        or subdivisions, consolidations or combinations of the common shares
        occurring prior to the distribution date, defined below.

        Until the earlier of (i) 10 days following a public announcement that a
        person or group of affiliated or associated persons has acquired a
        beneficial ownership of 15% or more of the outstanding common shares or
        (ii) 10 business days following the commencement of, or announcement of
        an intention to make, a tender offer or exchange offer the consummation
        of which would result in the beneficial ownership by a person or group
        of 15% or more of such outstanding common shares (the earlier of such
        dates being the "distribution date"), the rights will be evidenced, with
        respect to any of the common share certificates outstanding as of the
        record date.

        Until the distribution date, the rights will be transferred with and
        only with the common shares. Until the distribution date (or earlier
        redemption or expiration of the rights), new common share certificates
        issued after the record date will contain a notation incorporating the
        rights agreement by reference.

        Preferred shares purchased upon exercise of the rights are not
        redeemable and are entitled to quarterly dividend payments of 1000 times
        dividends declared on common shares, 1000 votes, voting together with
        common shares, and 1000 times the aggregate payment made to common
        shareholders in the event of liquidation.

        The rights are not exercisable until the distribution date and expire on
        December 31, 2007, unless extended or redeemed by the Company.




                                      F-14
<PAGE>   41
              APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                         June 27, 1998 and June 28, 1997



        The preferred stock may be issued in one or more series, the terms of
        which may be determined at the time of issuance by the board of
        directors, without further action by stockholders, and may include
        voting rights (including the right to vote as a series on particular
        matters), preferences as to dividends and liquidation, conversion,
        redemption rights and sinking fund provisions.

        The future issuance of preferred stock could reduce the rights,
        including voting rights, of the holders of common stock, and, therefore,
        reduce the value of the common stock. In particular, specific rights
        granted to future holders of preferred stock could be used to restrict
        the Company's ability to merge with or sell its assets to a third party,
        thereby preserving control of the Company by existing management.

        In November 1993, the Company completed an initial public offering
        (IPO), whereby the Company issued 2,550,075 shares of common stock at
        $7.17 per share and 1,955,000 redeemable warrants at $.10 per warrant.
        Two redeemable warrants entitled the holder to purchase 1.5 shares of
        common stock at $10.03 through November 9, 1998, subject to adjustment
        in accordance with anti-dilution provisions. The redeemable warrants
        were subject to redemption at $.10 per warrant on 30 days' prior notice,
        provided that the average closing price of the Company's common stock
        equaled or exceeded $12.90 for 20 consecutive trading days through
        November 9, 1998.

        The Company also issued to the underwriter of the IPO, for nominal
        consideration, warrants to purchase 255,000 shares of common stock and
        170,000 redeemable warrants (the "Representative's warrants"). The
        Representative's warrants were initially exercisable at $10.39 per share
        of common stock and $.15 per redeemable warrant for a period of four
        years commencing November 10, 1994.

        On September 3, 1997, the Company announced that it had met the
        requirements for the redemption of its redeemable warrants issued in
        connection with the Company's IPO and called the warrants for
        redemption. 2,082,451 redeemable warrants and 133,088 underwriter
        warrants were converted into 1,691,416 shares of common stock. The net
        proceeds were $15,234,000. The proceeds were used to repay all bank
        debt, to complete the acquisition of ASTeX Sorbios GmbH and increase the
        Company's working capital.

        In connection with the issuance of preferred stock in 1992, the Company
        issued warrants to purchase 290,045 shares of common stock. During
        fiscal 1996, 238,856 warrants were exercised at $6.40 per share. The
        remaining warrants expired in November 1996.

        The Company adopted the 1993 Stock Option Plan in fiscal 1994 and in
        fiscal 1995, adopted the 1994 Formula Stock Option Plan to award
        non-employee directors of the Company stock options. The Plans are
        administered by the Company's board of directors which has the authority
        to determine the recipients, number of shares, and the related terms and
        provisions of the options which may be granted.




                                      F-15
<PAGE>   42
              APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                         June 27, 1998 and June 28, 1997



        The Company applies APB Opinion No. 25 and related Interpretations in
        accounting for its stock option plans. Accordingly, no compensation cost
        has been recognized in connection with these plans. Had compensation
        cost for the Company's stock option plans been determined consistent
        with Statement 123, the Company's net earnings (loss) and net earnings
        (loss) per share would have been reduced to the following pro forma
        amounts.

<TABLE>
<CAPTION>
                                                      YEARS ENDED
                                           -----------------------------------
                                            JUNE 27,    JUNE 28,     JUNE 29,
                                              1998        1997         1996
                                           ----------   --------   -----------
<S>                                        <C>          <C>        <C>

        Net earnings (loss) as reported    $4,020,604   $937,759   $(7,296,775)
                                           ==========   ========   ===========
        Pro forma net earnings (loss)      $2,118,435   $225,740   $(7,841,368)
                                           ==========   ========   ===========

        Basic net earnings (loss)
         per share as reported             $     0.50   $   0.14   $     (1.16)
                                           ==========   ========   ===========
        Pro forma basic net earnings
         (loss) per share                  $     0.26   $   0.03   $     (1.24)
                                           ==========   ========   ===========

        Diluted net earnings (loss)
         per share as reported             $     0.47   $   0.14   $     (1.16)
                                           ==========   ========   ===========
        Pro forma diluted net earnings
         (loss) per share                  $     0.22   $   0.03   $     (1.24)
                                           ==========   ========   ===========
</TABLE>

        The effect of applying Statement 123 as shown in the above pro forma
        disclosures is not representative of the pro forma effect on net
        earnings in future years because it does not take into consideration pro
        forma compensation expenses related to stock options granted prior to
        fiscal 1996.

        The fair value of each option grant is estimated on the date of grant
        using the Black-Scholes option-pricing model with the following
        weighted-average assumptions used for grants issued in fiscal 1998, 1997
        and 1996: no dividend yield for all years; expected volatility of 75%
        for all years; risk-free interest rates of 5.8% for 1998 grants and 6%
        for 1997 and 1996 grants; and expected lives of 4 years for 1998 grants
        and 4 to 8 years for 1997 and 1996 grants.




                                      F-16
<PAGE>   43
              APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                         June 27, 1998 and June 28, 1997



        The following is a summary of stock option activity. All share and
        exercise price amounts have been adjusted to reflect the 3 for 2 split
        of common stock.

                                                EMPLOYEE STOCK OPTIONS
                                       -----------------------------------------
                                         OPTION                      WEIGHTED
                                         SHARES       OPTIONS         AVERAGE
                                       AVAILABLE    OUTSTANDING   EXERCISE PRICE
                                       ----------   -----------   --------------

        Balance at July 1, 1995          480,773      292,545         $ 4.21
            Options added                742,500           --             --
            Options granted             (546,075)     546,075           8.51
            Options exercised                 --     (111,525)          4.23
            Options expired               11,025      (11,025)          5.65
                                       ---------    ---------

        Balance at June 29, 1996         688,223      716,070           7.39
            Options granted             (349,088)     349,088           6.46
            Options exercised                 --      (52,964)          5.47
            Options expired               48,769      (48,769)          7.13
                                       ---------    ---------

        Balance at June 28, 1997         387,904      963,425           7.17
            Options added              1,132,500           --             --
            Options granted             (465,579)     465,579          11.61
            Options exercised                 --     (136,538)          6.08
            Options expired              101,800     (101,800)          9.61
                                       ---------    ---------

        Balance at June 27, 1998       1,156,625    1,190,666           8.84
                                       =========    =========

        The weighted-average fair value of options granted during fiscal 1998,
        1997 and 1996 was $6.98, $3.83 and $5.50, respectively. As of June 27,
        1998, 538,158 of the outstanding options were exercisable.

        The following is a summary of information relating to stock options
        outstanding at June 27, 1998:

<TABLE>
<CAPTION>
                                     OPTIONS OUTSTANDING              OPTIONS EXERCISABLE
                         -----------------------------------------  ----------------------
                           NUMBER                        WEIGHTED-    NUMBER     WEIGHTED-
                         OUTSTANDING      WEIGHTED-       AVERAGE   EXERCISABLE   AVERAGE
           RANGE OF      AT JUNE 27,  AVERAGE REMAINING  EXERCISE   AT JUNE 27,  EXERCISE
        EXERCISE PRICES     1998      CONTRACTUAL LIFE     PRICE       1998        PRICE
        ---------------  -----------  -----------------  ---------  -----------  ---------
<S>                      <C>          <C>                <C>        <C>          <C>
          $ 3.83- 5.33       91,690      2.4 years         $ 4.63      77,140      $ 4.64
            6.00- 9.00      593,600      2.7                 7.35     289,483        7.49
           10.00-13.92      499,776      4.6                11.29     170,335       11.10
           16.25-16.50        5,600      4.3                16.34       1,200       16.34
                          ---------                                   -------      ------

                          1,190,666      3.5                 8.84     538,158        8.24
                          =========                                   =======
</TABLE>





                                      F-17
<PAGE>   44
`1              APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                         June 27, 1998 and June 28, 1997



        Notes receivable for common stock purchases are due through October 2000
        or upon termination of employment with the Company, if earlier. Interest
        accrues at 6.28% per annum.

(7)     INCOME TAXES

        Income tax expense (benefit) consists of the following:

                                                      YEARS ENDED
                                           -----------------------------------
                                            JUNE 27,     JUNE 28,    JUNE 29,
                                              1998         1997        1996
                                           ----------   ----------  ----------

        Current:
            Federal                        $2,141,000   $ 775,000   $1,500,000
            State                             288,000     214,000      184,000
                                           ----------   ---------   ----------
                   Total current            2,429,000     989,000    1,684,000
                                           ----------   ---------   ----------

        Deferred:
            Federal                          (267,000)   (294,000)    (123,000)
            State                             304,000    (145,000)     (20,000)
                                           ----------   ---------   ----------
                   Total deferred              37,000    (439,000)    (143,000)
                                           ----------   ---------   ----------

                                           $2,466,000   $ 550,000   $1,541,000
                                           ==========   =========   ==========

        The actual tax expense differs from the "expected" tax expense (benefit)
        (computed by applying the U.S. federal corporate income tax rate of 34%
        to earnings (loss) before income taxes) as follows:

<TABLE>
<CAPTION>
                                                               YEARS ENDED
                                                   ------------------------------------
                                                    JUNE 27,    JUNE 28,     JUNE 29,
                                                      1998        1997         1996
                                                   ----------   --------   ------------
<S>                                                <C>          <C>        <C>

        Computed "expected" tax expense
         (benefit)                                 $2,205,446   $505,838   $(1,956,964)
        Increase (reduction) in income
         taxes resulting from:
          State taxes, net of federal benefit         390,720     45,540       108,783
          Goodwill amortization and write-off          46,569         --     2,396,649
          Acquisition related expenses                     --         --       981,800
          Research and experimentation tax credit     (87,248)   (44,000)     (133,000)
          Valuation reserve movement                 (171,000)        --            --
          Other                                        81,513     42,622       143,732
                                                   ----------   --------   -----------

                                                   $2,466,000   $550,000   $ 1,541,000
                                                   ==========   ========   ===========
</TABLE>




                                      F-18
<PAGE>   45
              APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                         June 27, 1998 and June 28, 1997



        Total income tax expense was allocated as follows:

<TABLE>
<CAPTION>
                                                        YEARS ENDED
                                            -----------------------------------
                                             JUNE 27,     JUNE 28,    JUNE 29,
                                               1998         1997        1996
                                            ----------   ----------  ----------
<S>                                         <C>          <C>         <C>

        Income from operations              $2,466,000    $550,000   $1,541,000

        Stockholders' equity, for 
          compensation expense for tax
          purposes in excess of amounts
          recognized for financial
          statement purposes.                 (276,300)    (62,242)    (284,101)
                                            ----------    --------   ----------

                                            $2,189,700    $487,758   $1,256,899
                                            ==========    ========   ==========
</TABLE>

        The tax effects of temporary differences that give rise to significant
        portions of the deferred tax assets and deferred tax liabilities are as
        follows:

<TABLE>
<CAPTION>
                                                          JUNE 27,     JUNE 28,
                                                            1998         1997
                                                        -----------  -----------
<S>                                                     <C>          <C>

        Deferred tax assets:
          Net operating loss carryforwards              $2,163,978   $  881,558
          Accrued liabilities                              283,178      271,797
          Inventory reserves                               613,176      547,934
          Accounts receivable, principally due to
            allowance for doubtful accounts                118,138      128,249
                                                        ----------   ----------
                      Total deferred tax assets          3,178,470    1,829,538

              Less: valuation allowance                    (99,000)    (270,000)
                                                        ----------   ----------

                      Deferred tax assets                3,079,470    1,559,538

        Deferred tax liabilities:

          Property and equipment, principally due
            to differences in depreciation methods         623,428      742,304
                                                        ----------   ----------

                      Net deferred tax assets           $2,456,042   $  817,234
                                                        ==========   ==========
</TABLE>

        The net change in the total valuation allowance for the year ended
        June 27, 1998 was $171,000. There was no change in the valuation
        allowance for the year ended June 28, 1997. The valuation allowance is
        principally attributable to state operating loss carryforwards.




                                      F-19
<PAGE>   46
              APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                         June 27, 1998 and June 28, 1997



        At June 27, 1998, the Company has net operating loss carryforwards for
        federal income tax purposes of approximately $800,000 which are
        available to offset future taxable income through 2010. The Company also
        has foreign operating loss carryforwards of approximately $2,200,000
        related to its foreign subsidiary which are available indefinitely to
        offset future taxable income of the subsidiary.

        In assessing the realizability of deferred tax assets, management
        considers whether it is more likely than not that some portion or all of
        the deferred tax assets will not be realized. Based upon the level of
        historical taxable income and projections for future taxable income over
        the periods during which deferred tax assets are deductible, management
        believes it is more likely than not the Company will realize the
        benefits of these deductible differences.

(8)     EARNINGS (LOSS) PER SHARE

        Basic earnings (loss) per share is based upon the weighted average
        common shares outstanding during each year. Diluted earnings (loss) per
        share is based upon the weighted average of common shares and dilutive
        common stock equivalent shares outstanding during each year. The
        weighted average number of shares used to compute diluted earnings
        (loss) per share consisted of the following:

<TABLE>
<CAPTION>
                                                         YEARS ENDED
                                               -------------------------------
                                                 1998        1997       1996
                                               ---------  ---------  ---------
<S>                                            <C>        <C>        <C>

        Weighted average common shares
          outstanding during the year          8,052,926  6,686,253  6,307,146

        Weighted average common equivalent
          shares due to stock options
          and warrants                           476,021     91,187         --
                                               ---------  ---------  ---------

                                               8,528,947  6,777,440  6,307,146
                                               =========  =========  =========
</TABLE>


(9)     SALES AND REVENUE

        Total revenue consists of product sales, research contract revenue and
        other revenue. Other revenue includes revenues from service and repair
        activities and consulting. Sales and revenue to government agencies for
        the years ended June 27, 1998, June 28, 1997 and June 29, 1996 were
        $1,757,496, $876,636 and $662,471, respectively. At June 27, 1998 and
        June 28, 1997, accounts receivable from these customers totaled $550,596
        and $581,027, respectively.

        One commercial customer accounted for 40%, 38% and 45% of total revenue
        for the years ended June 27, 1998, June 28, 1997 and June 29, 1996,
        respectively. At June 27, 1998 and June 28, 1997, accounts receivable
        from this customer totaled $3,307,984 and $3,919,586, respectively. In
        1997, a second customer accounted for approximately 10% of total
        revenue.




                                      F-20
<PAGE>   47
              APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                         June 27, 1998 and June 28, 1997



        Sales to customers in foreign countries for the years ended June 27,
        1998, June 28, 1997 and June 29, 1996 were $18,923,069, $10,082,704 and
        $7,328,015, respectively. At June 27, 1998 and June 28, 1997, accounts
        receivable from these customers totaled $8,297,593 and $1,764,059,
        respectively.

(10)    COMMITMENTS

        The Company may borrow up to $8,000,000 from a bank under an unsecured
        demand line of credit with interest at the bank's prime rate (8.5% at
        June 27, 1998). Borrowings under the line are limited to 100% of the
        Company's cash balance plus 80% of domestic accounts receivable under 90
        days outstanding. The Company may fix a portion or all of the
        outstanding balances under the line for periods up to the remaining term
        of the line. The line may be used for standby letters of credit.

        There are fees of 1.5% for any standby letters of credit and 0.25% on
        the unused portion of the line. There were no outstanding borrowings at
        June 27, 1998 and June 28, 1997. The line of credit expires in May 2000.
        No security pledges of assets can be granted nor dividends paid without
        the approval of the bank that issued the unsecured line of credit.

(11)    LONG-TERM DEBT

        The Company repaid all of its long-term debt during the second quarter
        of Fiscal 1998. An unsecured note payable, with interest at 7.19%,
        payable in monthly principal installments was subject to a prepayment
        penalty equal to the lender's lost net interest income resulting from
        any prepayment. This prepayment penalty was waived by the lender.

(12)    ACQUISITIONS

        On October 1, 1997, the Company completed the acquisition of Sorbios
        GmbH, renamed ASTeX Sorbios GmbH, a manufacturer of ozone generators and
        air ionizers for semiconductor production.

        The Company acquired all of the stock of Sorbios GmbH for a total
        purchase price of $3,682,639. The purchase price was paid in cash, from
        the Company's cash balances. Costs associated with the acquired
        in-process research and development expenses were charged to expense.

        On May 9, 1997, the Company completed its acquisition of the net assets
        of Converter Power, Inc., a manufacturer of high efficiency, small form
        factor power sources used in semiconductor, medical, scientific and
        industrial applications. At the acquisition date, the net assets
        acquired were transferred to a newly established subsidiary corporation,
        ASTeX CPI, Inc.




                                      F-21
<PAGE>   48
              APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                         June 27, 1998 and June 28, 1997



        The Company acquired the net assets, exclusive of certain liabilities of
        Converter Power, Inc. for a total purchase price of $7,378,958. The
        purchase price included $6,482,933 in cash, of which $4,415,137 was
        provided from the Company's current cash balances while $2,067,796 was
        provided from increased bank borrowings, and 60,482 shares of ASTeX
        common stock valued at $896,025 were issued to the prior owners of CPI.
        Costs associated with the acquired in-process research and development
        were charged to expense.

        The value of the ASTeX shares issued in connection with the acquisition
        of CPI was guaranteed by ASTeX to be at least $896,025 on May 8, 1998,
        subject to certain adjustments as provided for in the purchase and sales
        agreement. This minimum valuation requirement was satisfied.
        Accordingly, no further payment to the former CPI shareholders was
        required.

        On January 2, 1996 the Company completed its acquisition of Ehrhorn
        Technological Operations, Inc., a manufacturer of radio frequency (RF)
        generators used in semiconductor, medical imaging, medical sterilization
        and amateur radio communications applications. At the acquisition date,
        Ehrhorn Technological Operations, Inc.'s name was changed to ETO, Inc.

        The Company acquired all of the stock of ETO for a total purchase price
        of $16,749,358. The purchase price included $12,600,000 in cash, of
        which $4,600,000 was provided from the Company's current cash balances
        while the remaining $8,000,000 was provided from two unsecured notes
        from a bank, and 492,993 shares of common stock valued at $4,149,358
        were issued to the former shareholders of ETO. Costs associated with
        acquired in-process research and development were charged to expense.

        On November 21, 1995, the Company completed its acquisition of Newton
        Engineering Service, Inc. ("NES") and acquired all of the outstanding
        shares of NES. In connection with the acquisition the Company issued
        17,058 shares of common stock valued at $188,703 to the former
        shareholder of NES.




                                      F-22
<PAGE>   49
              APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                         June 27, 1998 and June 28, 1997



        All acquisitions have been accounted for by the purchase method of
        accounting and, accordingly, the purchase prices have been allocated to
        the assets acquired and the liabilities assumed based on their fair
        values at the acquisition dates. The consideration paid and the fair
        value of the assets acquired and the liabilities assumed at the
        acquisition dates are summarized as follows:

<TABLE>
<CAPTION>
                                                       YEARS ENDED
                                         --------------------------------------
                                           JUNE 27,     JUNE 28,      JUNE 29,
                                             1998         1997          1996
                                         -----------   ----------   -----------
<S>                                      <C>           <C>          <C>
        Consideration paid:
          Cash                           $ 3,682,639   $6,482,933   $12,600,000
          Common stock (60,482 shares
           in 1997 and 510,051 shares
           in 1996)                               --      896,025     4,338,061
                                         -----------   ----------   -----------

             Total consideration paid    $ 3,682,639   $7,378,958   $16,938,061
                                         ===========   ==========   ===========

        Allocation of purchase price:
          Accounts receivable            $ 1,180,473   $1,254,662   $ 3,171,403
          Inventories                        969,519    2,051,237     3,437,633
          Property and equipment and
           other assets                    2,550,583      768,589     5,536,793
          Liabilities assumed             (3,407,838)    (957,464)   (4,459,280)
          Acquisition related expenses,
           net of tax benefits where
           applicable                        212,423      945,000     2,203,000
          Goodwill and other intangible
           assets                          2,177,479    3,316,934     7,048,512
                                         -----------   ----------   -----------

             Total purchase price        $ 3,682,639   $7,378,958   $16,938,061
                                         ===========   ==========   ===========
</TABLE>

        The following unaudited pro forma results of operations give effect to
        the acquisitions as if the Sorbios acquisition had occurred at the
        beginning of fiscal 1997 and the CPI, ETO and NES acquisitions had
        occurred at the beginning of fiscal 1996. Such pro forma information
        reflects certain adjustments including amortization of goodwill,
        interest expense, interest income, income tax effect and an increase in
        the number of weighted average shares outstanding. This pro forma
        information does not necessarily reflect the results of operations that
        would have occurred had the acquisitions taken place as described and is
        not necessarily indicative of results that may be obtained in the
        future.




                                      F-23
<PAGE>   50
              APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                         June 27, 1998 and June 28, 1997



<TABLE>
<CAPTION>
                                                               YEARS ENDED
                                                  --------------------------------------
                                                   JUNE 27,      JUNE 28,      JUNE 29,
                                                     1998          1997          1996
                                                 -----------   -----------   -----------
                                                               (UNAUDITED)
<S>                                              <C>           <C>           <C>

        Pro forma total revenue                  $84,414,488   $59,457,723   $60,577,113
                                                 ===========   ===========   ===========

        Pro forma net earnings                   $ 4,877,294   $ 1,142,994   $ 3,084,909
                                                 ===========   ===========   ===========

        Pro forma net basic earnings per share   $      0.61   $      0.17   $      0.47
                                                 ===========   ===========   ===========

        Pro forma net diluted earnings per share $      0.57   $      0.17   $      0.45
                                                 ===========   ===========   ===========

        Pro forma weighted average common
          shares outstanding used to calculate
          pro forma basic earnings per share       8,052,926     6,738,411     6,620,778
                                                 ===========   ===========   ===========

        Pro forma weighted average common
          shares outstanding used to calculate
          pro forma diluted earnings per share     8,528,947     6,827,199     6,830,469
                                                 ===========   ===========   ===========
</TABLE>


(13)    TRANSACTION WITH STOCKHOLDER

        In 1997, the Company sold the net assets of ETO's Alpha product line
        with a cost of $565,022, to Alpha/Power, Inc. ("API") in exchange for a
        note receivable in an equal amount that is to be repaid in installments
        in 1998 and 1999. A majority of API is owned by a former owner of ETO
        who is currently an ASTeX stockholder. In connection with this sale, API
        agreed to assume and indemnify ETO against all obligations to provide
        warranty for Alpha products sold prior to the sale. There was no gain or
        loss associated with the sale.

(14)    NONCASH FINANCING AND INVESTING ACTIVITIES

        During the years ended June 28, 1997 and June 29, 1996, the Company
        issued 60,482 and 510,051 shares of common stock valued at $896,025 and
        $4,338,061, respectively, in connection with acquisitions.

        During the year ended June 29, 1996, the Company issued 27,000 shares of
        common stock in exchange for notes receivable from employees totaling
        $236,750.

        In connection with the exercise of stock options, a tax benefit of
        $276,300, $62,242 and $284,101 was recorded as additional paid-in
        capital for the years ended June 27, 1998, June 28, 1997 and June 29,
        1996, respectively.




                                      F-24
<PAGE>   51
              APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                         June 27, 1998 and June 28, 1997



(15)    GOODWILL WRITE-OFF

        In connection with its acquisition of ETO, the Company recorded goodwill
        of $7,048,512 which represented the excess of the purchase price over
        the fair value of ETO's net assets acquired and in process research and
        development. The goodwill was to be amortized over 15 years. Between the
        acquisition date and June 27, 1996 there was a precipitous decline in
        sales to one of ETO's major customers. In management's judgment, this
        decline in revenues was a permanent impairment of ETO's prospects. Based
        on this significant change, management made a reassessment of its
        remaining goodwill and recorded an impairment of goodwill in the amount
        of $6,813,562, which represented the goodwill balance at the
        reassessment date.

        In determining the impairment, management estimated ETO's cash flows
        over 14-1/2 years which represented the remaining business life cycle of
        ETO's existing technology. The cash flow analysis included an estimate
        of ETO's terminal value at the end of this period. The operating cash
        flow projections were based on ETO's estimated after-tax operating
        results less estimated capital expenditures. The undiscounted cash flows
        were assumed to be realized in installments over the 14-1/2 years.
        Because the undiscounted cash flow was less than the Company's carrying
        value of ETO, a charge for impairment of goodwill was recorded to the
        extent unamortized book value exceeded the related discounted cash flow.
        The cash flow was discounted using a weighted average borrowing cost of
        7.7%, which was comparable to rates available to the Company as of the
        reassessment date.

(16)    RETIREMENT PLANS

        Prior to January 1, 1997, the Company sponsored two defined contribution
        401(k) retirement plans covering substantially all employees of the
        Company. The Company contributed 20% of employee voluntary contributions
        up to 5% of eligible wages for the plan covering employees of ASTeX,
        ASTeX/Gerling Laboratories, and Newton Engineering Service, Inc. The
        Company contributed 50% of employee voluntary contributions up to 6% of
        eligible wages for the plan covering employees of ETO. Beginning January
        1, 1997, the Company merged the plans and under the new plan contributes
        50% of employee voluntary contributions up to 6% of eligible wages.
        Total expense under the plans amounted to $324,128, $110,214 and $72,547
        for the years ended June 27, 1998, June 28, 1997 and June 29, 1996,
        respectively.

(17)    SUBSEQUENT EVENTS (UNAUDITED)

        In July 1998, the Company signed a letter of intent to acquire certain
        assets and assume certain liabilities of a U.S. technology company for
        approximately $1,800,000 to be paid in a combination of cash and/or
        ASTeX stock. The transaction is expected to be completed late in 1998.

        During the first quarter of fiscal 1999, the Company commenced the
        consolidation of certain operating facilities which included significant
        employee terminations. The restructuring of the Company's operations is
        expected to allow the Company to more quickly respond to market changes
        through the elimination of fixed facility costs and the ability to
        better utilize its work force. The Company anticipates that costs
        incurred in the restructuring could amount to $1,600,000 which will be
        expensed during fiscal 1999.




                                      F-25
<PAGE>   52
              APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                         June 27, 1998 and June 28, 1997



(18)    QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>
                                     (IN THOUSANDS EXCEPT PER SHARE DATA)
                              --------------------------------------------------
                                                                        DILUTED
                                                                           NET
                                                  EARNINGS     NET      EARNINGS
                               TOTAL    GROSS   (LOSS) FROM  EARNINGS    (LOSS)
                              REVENUE   PROFIT   OPERATIONS   (LOSS)   PER SHARE
                              -------  -------  -----------  --------  ---------
<S>                           <C>      <C>      <C>          <C>       <C>

        1998
        ----
        First Quarter         $17,421  $ 6,474     $1,677     $1,155     $ 0.14
        Second Quarter         22,440    8,230      2,099      1,275       0.15
        Third Quarter          23,461    8,207      2,252      1,577       0.18
        Fourth Quarter         20,114    5,539       (119)        14         --
                              -------  -------     ------     ------     ------

        Year ended June 27    $83,436  $28,450     $5,909     $4,021     $ 0.47
                              =======  =======     ======     ======     ======

        1997
        ----
        First Quarter         $ 9,860    3,813        536        312       0.05
        Second Quarter          9,293    3,395        461        280       0.04
        Third Quarter          11,013    3,886        658        390       0.06
        Fourth Quarter         17,801    6,316          3        (44)     (0.01)
                              -------  -------     ------     ------     ------

        Year ended June 28    $47,967  $17,410     $1,658     $  938     $ 0.14
                              =======  =======     ======     ======     ======
</TABLE>


(19)    NEW ACCOUNTING PRONOUNCEMENTS

        Statement of Financial Accounting Standards (SFAS) Statement No. 130,
        Reporting Comprehensive Income, will become effective during fiscal year
        1999. Under the provisions of this Statement, the Company will be
        required to report all components of comprehensive income in a financial
        statement that is displayed with the same prominence as other financial
        statements. In addition to the net earnings or loss presently displayed
        in the consolidated statement of operations, the consolidated statement
        of comprehensive income will display items considered to be other
        comprehensive income. Such other comprehensive income will include
        foreign currency translation adjustments, which are presently displayed
        in the consolidated statement of stockholders' equity. The Company will
        also be required to display the accumulated balance of other
        comprehensive income separately from retained earnings and additional
        paid-in capital in the consolidated balance sheet. The effect of this
        standard is not expected to be material.

        SFAS Statement No. 131, Disclosures about Segments of an Enterprise and
        Related Information, will become effective during fiscal year 1999. At
        that time, the Company will be required to report financial and
        descriptive information about any reportable operating segments.
        Reportable operating segments are defined in Statement No. 131 as
        components of an enterprise for which separate financial information is
        available that is evaluated by senior management to allocate resources
        and assess performance.




                                      F-26
<PAGE>   53
              APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                         June 27, 1998 and June 28, 1997



        SFAS Statement No. 133, Accounting for Derivative Instruments and
        Hedging Activities, will become effective during fiscal year 2000.
        Statement No. 133 establishes accounting and reporting standards for
        derivative instruments, including certain derivative instruments
        embedded in other contracts, (collectively referred to as derivatives)
        and for hedging activities. It requires that an entity recognize all
        derivatives as either assets or liabilities in the statement of
        financial position and measure those instruments at fair value. If
        certain conditions are met, a derivative may be specifically designated
        as (a) hedge of the exposure to changes in the fair value of a
        recognized asset or liability or an unrecognized firm commitment, (b) a
        hedge of the exposure to variable cash flows of a forecasted
        transaction, or (c) a hedge of the foreign currency exposure of a net
        investment in a foreign operation, an unrecognized firm commitment, an
        available-for-sale security, or a foreign-currency-denominated
        forecasted transaction.

        The accounting for changes in the fair value of a derivative (that is,
        gains and losses) depends on the intended use of the derivative and the
        resulting designation.

        Under this Statement, an entity that elects to apply hedge accounting is
        required to establish at the inception of the hedge the method it will
        use for assessing the effectiveness of the hedging derivative and the
        measurement approach for determining the ineffective aspect of the
        hedge. These methods must be consistent with the entity's approach to
        managing risk.

        Statement of Position (SOP) 98-1, Accounting for the Costs of Computer
        Software Developed or Obtained for Internal Use, will become effective
        in fiscal year 2000. SOP 98-1 requires that certain internal and
        external costs be expensed or capitalized when incurred to develop or
        obtain software for internal use. Generally, costs incurred during the
        preliminary project and post-implementation/operation stages, as well as
        conversion and general and administrative costs are to be expensed as
        incurred. Certain costs incurred during the application and development
        stage are to be capitalized.

        The Company is evaluating the impact of Statement Nos. 130, 131, 133 and
        SOP 98-1.




                                      F-27