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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 28, 1997
                        COMMISSION FILE NUMBER 0000912842

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

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

           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)

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

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

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

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

                          COMMON STOCK, $0.1 PAR VALUE
                    REDEEMABLE COMMON STOCK PURCHASE WARRANTS

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

CHECK WHETHER THE ISSUER:  (1) 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
                                    ---        ---

CHECK IF THERE IS NO DISCLOSURE OF DELINQUENT  FILERS IN RESPONSE TO ITEM 405 OR
REGISTRATION  S-B IF NOT  CONTAINED  IN THIS  FORM,  AND NO  DISCLOSURE  WILL 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 Issuer's total revenues for its most recent fiscal year were $ 47,967,138.

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 24, 1997 was approximately  $75,595,000.  As of September 24,
1997,  4,556,899 shares of Common Stock,  $.01 par value per share,  were issued
and outstanding.

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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.  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.  This 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  direct current  ("DC"),  radio
frequency ("RF"),  and microwave  generators.  These are sold to medical capital
equipment manufacturers ("MCEMs") for use in magnetic resonance imaging ("MRI"),
medical  equipment  sterilization,  and medical  lasers.  The  Company  provides
specialty   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 nine of the last 11 years and year-to-year revenue growth in 10
of the last 11 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 28,  1997  includes  $4.5  million of cash and
investments,  $17.0  million of  working  capital,  tangible  net worth of $20.1
million,  a  current  ratio  of 2.8 to 1 and  long  term  debt of $6.4  million,
excluding current maturities.

For the fiscal year ending June 28, 1997 ("Fiscal  1997"),  the Company achieved
record  revenues  for the year of $48  million,  a 23%  increase  over the $39.1
million  reported in the prior fiscal year ending June 29, 1996 ("Fiscal 1996").
Net  earnings  for the year were  $938,000,  or $0.19 per share  fully  diluted,
including an  in-process  research  and  development  ("R&D")  write-off of $1.5
million  associated with the acquisition of Converter Power, Inc. ("CPI") in the
fourth  quarter.  This  performance  occurred  during a severe  downturn  in the
semiconductor  capital  equipment  industry  during the first three  quarters of
Fiscal 1997.

The Company continued to invest heavily in R&D during Fiscal 1997,  leading to a
series of new  product  introductions  and design  wins.  During  the year,  the
Company added record levels of supply agreements



                                       1





and continued to strengthen its overall capability both through additions to the
senior management team and through the acquisition of CPI.  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 $21.70 billion
in 1996 to $38.1 billion in the year 2000. However, Dataquest predicts a decline
of around 10% in 1997, to $19.6 billion.  The component  segment of this market,
which is available to ASTeX, is estimated by management to be approximately $600
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 plasma deposition  sources
for  intermetal   dielectric  and   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.

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) and to larger  wafer  sizes  (from 200 mm to 300 mm)  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




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and  through  this  process to  establish  its  strategic  position as a leading
supplier  of  advanced  technologies  to  the  semiconductor  capital  equipment
industry.

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 and  industrial  laser  manufacturers.  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
market,  and by the  desire to  balance  the  cyclicality  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 focused on a new way to produce synthetic diamond
using  a  CVD   process.   Diamond   has  a  unique   combination   of  physical
characteristics  that are not found in other  materials.  Diamond is the hardest
readily available material,  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 electrical 



                                       3






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 potential uses in a broad
range of commercial 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 optical coatings to protect
sensitive  lenses with a  scratch-resistant  surface;  and  advanced  electronic
devices capable of operating in high temperature and corrosive environments.

CVD diamond is superior in many respects to currently used  materials  including
tungsten  carbide and  polycrystalline  diamond  ("PCD").  CVD diamond is a much
harder material than tungsten carbide and, although it currently costs more than
PCD, it can be used in a variety of tooling applications where PCD cannot.

Industry  analysts  have  projected  the global CVD diamond  industry to grow to
revenues of $800 million by the year 2000. Current estimates for this market are
less than $100 million in estimated  revenues in 1997. As a result,  the Company
believes it will take longer for the  industry to expand to this level,  perhaps
until  2010.  The annual  equipment  market  available  to ASTeX at that time is
estimated by management at between $100 and $200 million.

The CVD diamond  industry's  growth rate is  controlled to a large extent by two
key factors:  (1) CVD diamond's cost per carat,  and (2) the rate of new product
development incorporating CVD diamond. As the leading commercial supplier to the
CVD  diamond  market,  one of ASTeX's key goals is to drive down the cost of CVD
diamond,  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  either  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 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




                                       4






improved  time to market to 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.

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.

The  Company's  diamond   deposition   products  include  such  standard  plasma
deposition systems as the AX6300 through the AX6560.  These diamond reactors are
primarily  used  in the  production  of  bulk  diamond  for  thermal  management
applications  and  in  research  and  development  for  coating  tools  and  for
electronics applications. The base price of the AX6300 is approximately $300,000
and the base price of the AX6500 is approximately $450,000.

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 and gallium arsenide
semiconductor  devices.  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.

PRODUCTS UNDER DEVELOPMENT

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 are expected
to increase in Fiscal 1998 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 in the last half of the year.
Revenues from these  products are expected to increase  significantly  in Fiscal
1998 as the new equipment is accepted in the market place.

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




                                       5






The Company is developing 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.  Introduced in July 1997, the
Company  expects to offer initial  shipments in limited  quantities in the first
half of Fiscal 1998 with production ramping in the second half of the year.

The Company is developing a new line of intelligent  microwave  power  supplies,
SmartPower(TM),  primarily for use in the semiconductor industry.  Introduced in
July 1997,  these generators 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 in the second half of Fiscal 1998.

The Company is developing high performance RF linear amplifiers for advanced MRI
applications.  In addition,  new RF generator  technology is being developed for
use in medical  equipment  sterilization  systems.  The  Company  is  developing
several  new DC  switching  power  supplies  for medical  applications  to offer
improved  price/performance.  These are  expected to go into  production  during
Fiscal 1998.

During Fiscal 1997, the Company upgraded the power capability of the AX6600 from
75kW to 100kW to increase the throughput of this production  diamond  deposition
system.  The Company is working to improve the reactor design to further enhance
throughput.  The Company is now looking to place early  production units of this
product with key CVD diamond customers.

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.

During Fiscal 1997,  1996,  and 1995,  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  $8.7
million,  $6.9  million,  and $4.1 million or 18%, 18% and 20% 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 $7.3 million, $5.0 million and $2.8 million
during Fiscal 1997,  1996, and 1995,  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  which  might fund the  development  simply to
ensure its  availability  in the




                                       6






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 thick
diamond  substrates  and tool  coatings.  Researchers  are examining  additional
applications using microwaves and plasmas for other manufacturing processes.

During  Fiscal  1995,  the Company  completed a $1.5 million  contract  with the
Defense  Advanced  Research  Projects  Agency  ("DARPA")  to develop CVD diamond
substrates  for thermal  management  applications  in  multi-chip  modules.  The
success of this contract resulted in a continuation of funding in Fiscal 1996 by
DARPA in the amount of $900,000.  Management  anticipates a continuation of this
contract to provide  diamond  material for a military  application  with a major
government  supplier  as a  subcontractor.  Recently,  the Company was awarded a
continuation of a Phase II Small Business  Innovative  Research ("SBIR") program
from DARPA for the development of diamond deposition at low temperatures.

The Company has been awarded a Phase II SBIR follow-on grant by National Science
Foundation  ("NSF") to conduct work in ionized physical vapor deposition ("PVD")
processes  for  producing  specialty  materials.  Furthermore,  two Phase I SBIR
contract  proposals  have received  technical  approval  from the  Department of
Energy. These contracts await  administrative and appropriation  clearance prior
to final award of contracts. The Company is currently collaborating with several
major firms and  anticipates  awards or  continuation of awards with a number of
partners for additional  government funding for diamond and specialty  materials
development.

Supporting the Company's research and development group are 13 Ph.D.s as well as
21  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  1997,   1996,  and  1995,   Applied   Materials   accounted  for
approximately  38%, 45%, and 41% of the Company's  consolidated  total  revenue.
Phillips Medical Systems  accounted for approximately 10% of the Company's total
revenue  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 6% of total revenue in Fiscal 1997.

While sales to Applied  Materials  represents 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.





                                       7






In the semiconductor  market, the Company sells DC, RF and microwave  generators
and subsystems,  microwave  plasma sources and subsystems,  and ozone generators
and subsystems to Applied Materials, GaSonics, Lam Research, 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 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 1997 include major U.S.-based industrial and research firms,
European   commercial  and  governmental  R&D   organizations  and  many  others
worldwide.  During Fiscal 1997,  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.

The Company also sells  systems and  components  to a number of  researchers  in
industrial,  university,  and  government  laboratories  for a wide  variety  of
applications,  including the Naval Research  Laboratory,  duPont, NASA, and many
others.

MARKETING AND SALES

The  Company  markets its  products  through  various  channels,  including  its
management and research  personnel as well as a direct sales and marketing group
of 20 persons.  The Company  maintains  direct  sales and  marketing  activities
through  its  Woburn,  Massachusetts,  headquarters  as  well  as  its  Beverly,
Massachusetts,  site, its Santa Clara,  California,  technical sales and support
office, its Austin,  Texas,  support office and its Colorado Springs,  Colorado,
site.  The  Company  also  employs  32  independent  sales  representatives  and
distributors in the U.S., Europe, and the Far East. The Company has historically
generated a  significant  level of its total  revenue from sales in the Far East
and Europe, which the Company expects to continue.  The Company is exploring the
possibility of  establishing  separate  ventures in the Far East and Europe with
organizations which have established sales groups in these territories.

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.

COMPETITION

The Company believes that it is the largest provider of microwave plasma sources
and  microwave  power  supplies in the world.  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





                                       8





competition in certain market niches.  In the ozone generator market the Company
competes with companies such as Sumitomo Precision Products, Sorbios, and Ebara.
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's  strategy is to compete on the basis of its  technical  expertise,
core  competencies,  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 advanced materials field, and particularly the semiconductor and
CVD diamond fields, are undergoing significant technological change. The Company
expects plasma processing and CVD diamond technology 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,  the
Company must have  world-class  manufacturing  capabilities in order to meet the
needs of its customers.

The loss of any of its key employees to a competitor  could adversely affect the
Company's  competitive  position.  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; and
general domestic and international economic conditions; and exchange rates.

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  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





                                       9







The Company  currently  owns 16 U.S.  patents and one Canadian  patent,  and has
three  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 1997,  ASTeX  registered  one new trademark and received five new
patents.  In September 1996, ASTeX obtained a patent on the design of its AX6500
Diamond  Reactor  which is  particularly  adapted to form an enlarged  symmetric
plasma for uniformly processing large substrates.  In October 1996, a patent was
received for  fluid-cooled  dielectric  windows for plasma  applicators  used in
producing  reactive  gases for  processing  applications.  Two patents issued in
April  1997:  one for  ASTeX's  SmartMatch  and the other  for its  fluid-cooled
microwave plasma applicator for absorbing fluids.  The Company's ozone generator
cell and system patent was issued in June 1997.

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  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 28, 1997 the Company's  backlog
was approximately $13,754,000 of which $13,340,000 was for standard products and
$414,000 was for research contracts. The backlog at June 29, 1996 was $7,870,000
of which  $7,103,000  was for  standard  products  and $767,000 was for 





                                       10






research contracts. The Company expects to complete all standard product backlog
during the next six  months and all  research  contact  backlog  during the next
twelve months.  The backlog figures exclude orders under three supply agreements
with major semiconductor  capital equipment  manufacturers.  During Fiscal 1997,
the Company  received new supply  agreements  and  additions to existing  supply
agreements for a total of $46,000,000.  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 28, 1997, the Company  employed 427 persons on a full-time  basis, of
which 87 were temporary hires. The Company employs 38 persons in administration,
20  in  sales  and  marketing,  79  in  research  and  development  and  203  in
manufacturing.  The Company  believes that its relations  with its employees are
satisfactory.

ITEM 2.  FACILITIES

The Company occupies approximately 49,000 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,  provides an additional  11,000 square feet in Fiscal 1998.  The lease
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 $44,417 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 $17,467 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, 1998.  The rent for this facility is $4,262 per month.
The Company maintains office and manufacturing facilities in Modesto, California
in  approximately  11,500  square feet of leased  space.  This lease  expires on
February 28, 2000. The rent for this facility is approximately $5,831 per month.
The Company  also  maintains a sales and service  office in 2,600 square feet of
leased space in Santa Clara,  California.  The rent for this space is $3,640 per
month and the lease expires on June 30, 1998.

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 1997 through the solicitation of proxies of otherwise.






                                       11









                                     PART II


ITEM 5.           MARKETS FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Corporation's  Common Stock and Redeemable  Warrants have been traded on the
National Association of Securities Dealers Automated Quotation System - National
Market System ("NASDAQ/NMS") under the symbols "ASTX" and "ASTXW," respectively.
On  September  24,  1997,  the closing bid and ask prices for the  Corporation's
Common Stock as reported by NASDAQ/NMS  were $21 5/8 and $21 7/8,  respectively,
and the bid and asked prices for the Redeemable Warrants were $3 1/2 and $3 3/4,
respectively.  The  Redeemable  Warrants have been called for  redemption by the
Corporation.  The redemption  date is October 7, 1997. As of September 24, 1997,
the  Corporation  had 169  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 2,
1995  through  September  24,  1997.  Such  quotations   represent   interdealer
quotations without adjustment for retail markups,  markdowns, or commissions and
may not represent actual transactions.

<TABLE>
<CAPTION>
                                                                                       Sale
                                                                                        ----

1996                                                                            High             Low
----                                                                            ----             ---
<S>                                                                           <C>                <C>  
First Quarter                                                                 $ 18              $   11 1/8
Second Quarter                                                                  17 1/4              11 3/4
Third Quarter                                                                   16 3/8              12 5/8
Fourth Quarter                                                                  23                  11 3/4

1997
----

First Quarter                                                                 $  12 5/8         $  7 3/4
Second Quarter                                                                    12 3/4            6 3/4
Third Quarter                                                                     14 5/8            8 3/4
Fourth Quarter                                                                    17                9 1/8

1997
----

First Quarter (through September 24, 1997)                                    $  23 3/8         $  15 5/8

</TABLE>




                                       12







ITEM 6.           SELECTED CONSOLIDATED FINANCIAL DATA

<TABLE>
<CAPTION>
                                 ======================================================================
FISCAL YEAR(1)                       1997                      1996            1995            1994            1993
OPERATIONS:                      ------------              ------------      ----------    ------------
<S>                             <C>                       <C>               <C>           <C>         <C>         
  Total revenue                  $ 47,967,138              $ 39,135,596      20,004,853    $ 13,357,471    $  8,444,426
  Gross profit                     17,409,904                15,771,626       8,191,621       6,109,033       4,041,407
  Operating income(loss)            1,658,805                (6,077,763)        798,955         358,110         215,691
  Net income (loss)                   937,759                (7,296,775)      1,127,748         518,041         149,292
  Earnings (loss) per share      $       0.19              $      (1.74)           0.28    $       0.15    $       0.06
  Weighted average common
   shares outstanding               4,829,114                 4,204,764       3,992,100       3,433,800       2,403,700

BALANCE SHEET:
  Working capital                $ 16,956,302              $ 19,216,542      17,671,056    $ 19,697,944    $  4,186,165
  Total assets                     39,327,221                34,361,426      25,077,534      24,569,572       7,554,492
  Total long-term debt              6,368,913                 6,169,517               0               0          75,437
  Total liabilities                15,838,211                13,065,618       3,183,770       2,465,829       1,921,692
  Stockholders, equity           $ 23,489,010              $ 21,295,808      21,893,764    $ 22,103,743    $  5,632,800

QUARTERLY 1997:                       1ST                        2ND             3RD             4TH
                                 ------------              ------------      ----------    ------------
  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              0                         0               0       1,500,000
  Operating income                    535,696                   461,072         658,483           3,554
  Net income(loss)                    311,916                   279,588         390,399         (44,144)
  Earnings (loss) per share      $       0.07              $       0.06    $       0.09    $      (0.01)

QUARTERLY 1996:
  Total revenue                  $  5,639,415              $  6,858,967    $ 12,681,488    $ 13,955,726
  Gross profit                      2,123,348                 2,943,620       4,974,459       5,730,199
  Acquisition-related expenses              0                 2,953,000               0         (65,353)
  Write-off of goodwill                     0                         0               0       6,813,562
  Operatingincome(loss)               232,292                (2,357,507)      1,183,271      (5,135,819)
  Netincome(loss)                     298,520                (2,394,113)        724,997      (5,926,179)
  Earnings(loss)per share        $       0.07              $      (0.57)   $       0.16    $      (1.34)


(1) The fiscal year ends for the periods presented are: June 28, 1997; June 29, 1996; July 1, 1995; July 2, 1994; and June 30, 1993.

</TABLE>



                                       13




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

RESULTS OF OPERATIONS

The following  table  contains  income and expense  items from the  consolidated
statements  of  operations  for  Fiscal  1997,  1996,  and 1995  expressed  as a
percentage of total revenue.



<TABLE>
<CAPTION>

FISCAL YEAR                                                 1997             1996             1995
-------------------------------------------------------------------------------------------------------

<S>                                                             <C>              <C>             <C>    
Total revenue                                                   100.0 %          100.0 %         100.0 %

Total cost of sales and revenue                                  63.7             59.7            59.0
                                                       ---------------   --------------   -------------

Gross profit margin                                              36.3             40.3            41.0
                                                       ---------------   --------------   -------------

Selling expenses                                                  6.2              8.4            10.0
General and administrative expenses                               8.2              9.7            12.8
Research and development expenses, net                           15.3             12.9            14.2
Acquisition-related expenses                                      3.1              7.4             0.0
Write-off of goodwill                                                             17.4             0.0
                                                                  0.0
                                                       ---------------   --------------   -------------
Total operating expenses                                         32.8             55.8            37.0

Earnings (loss) from operations                                   3.5           (15.5)             4.0
                                                       ---------------   --------------   -------------

Total other expense (income)                                      0.4            (0.8)           (3.6)
                                                       ---------------   --------------   -------------

Earnings (loss) before income taxes                               3.1           (14.7)             7.6

Income tax expense                                                1.1              3.9             2.0
                                                       ---------------   --------------   -------------

Net earnings (loss)                                               2.0 %         (18.6) %           5.6 %
                                                       ---------------   --------------   -------------
</TABLE>



FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996


REVENUES

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. ETO, acquired half-way through





                                       14





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 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 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 40.3% in Fiscal
1996 to 36.3% in Fiscal 1997,  primarily due to the  acquisitions of ETO and 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.  The  Company's  goal is to  improve  future  gross  margins  with the
introduction  of  new  products  with  anticipated   higher  margins,   improved
manufacturing  efficiencies and methods, and increased sales volumes spread over
certain fixed costs.


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 1997
there was an  additional  six  months of ETO and two months of CPI  general  and
administrative  expenses compared to Fiscal 1996. Despite these additions,  cost
reduction efforts 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, including an integrated Chemical Plasma Source ("CPS") for photoresist
strip and a new combined RF and microwave  subsystem for high-density plasma CVD
and etch for semiconductor production. In addition, the Company introduced three
new  products at year end,  including  ASTRON for chamber  clean,  SOLO3 for wet
bench  applications,  and  SmartPower,  a  new  line  of  intelligent  microwave
generators.  The Company is committed to continued  investments  in research and
development  in order to advance  its  position  as a market  and  technological
leader.

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 CPI's  in-process
research  and  development.  This  compares to  acquisition-related  expenses of
$2,888,000  incurred with the  acquisitions  of ETO and NES in Fiscal 1996.  See
Footnote 11 of the Notes to  Consolidated  Financial  Statements.  In the fourth
quarter of Fiscal 1996,  the Company  recorded an  impairment of goodwill in the
amount of $6,814,000 associated with the ETO acquisition. See Footnote 14 of the
Notes to Consolidated Financial Statements.





                                       15






OPERATING INCOME

Operating  income was $1,659,000 in Fiscal 1997 compared to a loss of $6,078,000
in Fiscal 1996. 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 6.6% of total  revenue  compared to  $3,624,000  or 9.3% 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 1996.  These changes were the result
of the use of cash for the acquisitions of ETO and 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
are no comparable costs in Fiscal 1997.

FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995


REVENUES

Total revenue increased by 96% for Fiscal 1996 to $39,136,000 compared to Fiscal
1995. Of this increase,  55% was due to increased sales to semiconductor capital
equipment manufacturers,  while 45% was due to the acquisition of ETO. Increased
semiconductor  sales were driven by a 209% increase in ozone  products and a 50%
increase in microwave and plasma products.

Research contract revenue decreased in Fiscal 1996 by 58% or $1,243,000 compared
to Fiscal 1995 while funding used to offset  research and  development  expenses
increased by  $1,076,000,  for a net decline of 7%. Other revenue  consisting of
service, spare parts and repairs increased by 191% to $2,066,000 in Fiscal 1996,
primarily due to the  acquisition of ETO which obtains a larger  fraction of its
total revenue from this category.


GROSS PROFIT

Gross profit  increased by  $7,580,000  or 93% in Fiscal 1996 compared to Fiscal
1995. Gross margin as a percent of total revenue  decreased from 41.0% in Fiscal
1995 to 40.3% in  Fiscal  1996  primarily  due to the  acquisition  of ETO whose
products have lower gross margins than other product lines in the Company.


SELLING, GENERAL AND ADMINISTRATIVE

Selling expenses  decreased to 8.4% of sales in Fiscal 1996 from 10.0% in Fiscal
1995,  although  gross  spending  increased  by 66% due to the addition of ETO's
selling  expenses  and to  increased  personnel  in the  direct  sales and sales
support  functions,  increased  consulting and travel and increased  promotional
expenses.  General and  administrative  expenses  decreased  to 9.7% of sales in
Fiscal 1996 compared to





                                       16






12.8% in  Fiscal  1995,  although  gross  spending  increased  by 49% due to the
acquisition of ETO and to additional personnel, increased consulting and travel,
and increased legal and accounting fees.


RESEARCH AND DEVELOPMENT

Net research and development  expenses  increased by 78% to $5,043,000 in Fiscal
1996 compared to Fiscal 1995.  Gross spending  (total  research and  development
spending  including  funded  joint  development  and the direct cost of research
contracts)  increased  by 68% to  $6,869,000  in Fiscal 1996  compared to Fiscal
1995. The increased gross spending was primarily due to a technology development
agreement with Applied Materials and increased new product  development,  offset
by a reduced level of research contract spending.

Acquisition-related   expenses  of  $2,888,000  were  incurred  in  Fiscal  1996
associated with the acquisitions of ETO and NES. See Footnote 11 of the Notes to
Consolidated  Financial  Statements.  In the fourth  quarter of Fiscal 1996, the
Company  recorded an  impairment  of goodwill in the amount of  $6,814,000.  See
Footnote 14 of the Notes to  Consolidated  Financial  Statements.  There were no
comparable expenses in Fiscal 1995.


OPERATING INCOME

The Company  incurred an operating loss of $6,078,000 in Fiscal 1996 compared to
an  operating  profit of $799,000 in Fiscal  1995.  Excluding  one-time  charges
associated with the ETO acquisition (acquisition-related costs and non-recurring
goodwill  write-off)  operating  income  would  have  been a  record  profit  of
$3,624,000 (9.3% of sales) or an increase of 354% compared to Fiscal 1995.


OTHER EXPENSE AND INCOME TAXES

Interest expense increased significantly in Fiscal 1996 compared to Fiscal 1995,
while interest income decreased, all driven primarily by bank borrowing and cash
used for the  acquisition  of ETO.  The net  effect  was a 56%  decline in other
income to $322,000 in Fiscal 1996.

Income tax expense was  $1,541,000 in Fiscal 1996 compared to $401,000 in Fiscal
1995. 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 1995.


FOREIGN CURRENCY FLUCTUATIONS

The  Company's  foreign  revenues are  generally  denominated  in U.S.  dollars.
Accordingly,  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





                                       17






At Fiscal  1997  year end the  Company  had cash and  long-term  investments  of
$4,546,000 with working capital of $16,956,000  compared to Fiscal 1996 when the
Company had cash and short-term  investments of $7,173,000,  and working capital
of $19,217,000.

Footnote 11 of the Notes to Consolidated Financial Statements contains a summary
of recent acquisitions completed by the Company. These include 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 1,700,050  shares of common stock and 1,955,000
five-year  redeemable  warrants  at  prices  of  $10.75  per share and $0.10 per
warrant. See Footnote 6 of the Notes to Consolidated  Financial Statements.  The
common stock and redeemable  warrants are traded on NASDAQ/NMS under the symbols
ASTX and ASTXW, respectively.  The redeemable warrants are subject to redemption
at $0.10 per warrant on 30 days prior notice,  provided that the average closing
price of the Company's  common stock equals or exceeds $19.35 for 20 consecutive
trading days. On September 3, 1997,  the Company  announced that it had met this
requirement and would call the warrants for redemption.  If all the warrants are
exercised,  this would provide  additional equity financing of approximately $14
million for the  Company.  These funds would be used to reduce bank debt and for
general working capital purposes.

The  Company   also  issued  to  the   underwriter   of  the  IPO,  for  nominal
consideration,  warrants to purchase  170,000 shares of common stock and 170,000
redeemable  warrants.  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 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
CPI,  $1,087,000  for  additions  to  property,   equipment,  and  patents,  and
$1,299,000  for the purchase of  investments,  offset by sales of  $1,991,000 in
investments.  Investments are primarily commercial paper and government treasury
bills. The Company's cash flows from financing activities consisted primarily of
proceeds of 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 primarily due
to exercise of employee  stock  options.  The  proceeds of notes  payable were a
result of additional borrowings for the acquisition of 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 acquisition of ETO
less  cash  acquired  with  the  acquisitions  of ETO and  NES,  $2,895,000  for
additions to property, equipment, and patents, $250,000 for an equity investment
in LES,  and  $3,006,000  for the  purchase of  investments,  offset by sales of
$11,242,000  in  investments.  Investments  are primarily  commercial  paper and
government  treasury bills.  The Company's cash flows from financing  activities
consisted  primarily of proceeds of two notes payable for $8,000,000 used in the
acquisition of ETO offset by $689,000 of note repayments (See Footnote 10 of the
Notes to  Consolidated  Financial  Statements),  and $1,999,000 from issuance of
common  stock which was  primarily  due to exercise  of  investor  warrants  and
exercise of employee stock options.

During  Fiscal  1995 the  Company  generated  $524,000  in net cash  flows  from
operating  activities  and  used a net  $10,849,000  for  investing  activities,
primarily  for the purchase of  $14,230,000  of  investments  and  $1,484,000 in
additions to property,  equipment, and patents, offset by sales of $4,758,000 of
investments. The Company used $1,338,000 for financing activities, primarily for
a stock  repurchase  program under which  220,538  shares were  repurchased  for
$1,413,000 at an average price of $6.41 per share. The stock repurchase  program
objective was to support the stock price in the open market.  All



                                       18





treasury  stock held was retired on July 3, 1995. The Board of Directors has not
terminated the stock repurchase program, but no shares have been purchased since
March 30, 1995.

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 for working  capital
purposes,  with  interest at the bank's  prime rate.  There were no  outstanding
borrowings under this line of credit at June 28, 1997 and as of the date of this
report. (See Footnote 9 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. In
addition,  the Company has made certain  negative pledges against selling assets
without the Bank's consent.

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 the potential to increase revenue growth and profitability.  The Company
has entered  into a binding  purchase  agreement to acquire  certain  assets and
assume  certain  liabilities  of a German  company,  which is  expected to close
within the next month.  The purchase price of  approximately $4 million is to be
paid in cash at  closing,  subject  to  adjustment.  The  Company  has  adequate
financial  resources to complete  this  acquisition  within its existing  credit
facilities. See Footnote 16 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,  other than the funds raised by the announcement to redeem
all of the Company's unexercised redeemable warrants.


NEW ACCOUNTING PRONOUNCEMENTS

In Fiscal  1998 and 1999,  the Company  will be  required  to adopt  several new
accounting  pronouncements.  See  Footnote  18  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.


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 1997,
1996,  and 1995  accounted  for 76%, 77% and 73% of revenues,  respectively.  In
Fiscal Years 1997,  1996, and 1995,  sales to Applied  Materials,  the Company's
largest customer in each of these periods, accounted for approximately 38%, 45%,
and 41% of the Company's revenues,  respectively. The Company expects that sales
to Applied  Materials  will





                                       19






continue to represent a significant  portion of the  Company's  revenues for the
foreseeable  future,  although the  acquisitions  of ETO and 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.


RELIANCE ON OEM CUSTOMERS; LENGTHY SALES CYCLE

The  Company's  products  are  principally  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.
See "Business-Marketing and Sales."


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 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
manufacturers.  Moreover,  the Company's  ability to compete  effectively in the
Japanese  market  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. See "Business-Marketing and Sales."


FOREIGN REVENUES

The Company  does  business  worldwide,  both  directly  and via sales to United
States-based OEMs who sell such products  internationally.  In Fiscal 1997, 1996
and 1995, foreign revenues accounted for 21%, 19% and 15%, 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. See "Business-Marketing and
Sales."




                                       20






HIGHLY COMPETITIVE INDUSTRY

The markets for the  Company's  products are highly  competitive  and subject to
rapid  technological  change.  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. See "Business-Competition."


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  to meet  customer  requirements  and to
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. See "Business- Research and Development."


MANAGEMENT OF GROWTH

The Company has recently gone through a period of rapid growth. Due to the level
of technical and marketing  expertise  necessary to support its existing and new
customers, the Company must attract 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 such personnel.  The Company's expansion 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 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  market  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,  and  market





                                       21






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.





                                       22





ITEM 8.  FINANCIAL STATEMENTS

         The following financial statements are filed as part of this report:
<TABLE>
<CAPTION>

                                                                                        Page
                                                                                        ----

<S>                                                                                   <C>
         Independent Auditors' Report                                                    F-2


         Consolidated Balance Sheets as of June 28, 1997 and June 29, 1996               F-3


         Consolidated Statements of Operations for the Years Ended
         June 28, 1997, June 29, 1996, and July 1, 1995                                  F-4


         Consolidated Statements of Stockholders' Equity for the Years
         June 28, 1997, June 29, 1996, and July 1, 1995                                  F-5


         Consolidated Statements of Cash Flows for the Years Ended
         June 28, 1997, June 29, 1996, and July 1, 1995                                  F-6


         Notes to Consolidated Financial Statements                                      F-8

</TABLE>

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


         Not Applicable




                                    PART III


         Items  10  to  13  are  incorporated  by  reference  to  the  Company's
definitive  Proxy  Statement  to be  filed  with  the  Securities  and  Exchange
Commission.




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

        EXHIBITS        

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

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.

11                 Statement Re: Computation of Per Share Earnings.

21                 Revised List of Subsidiaries.

23                 Consent of KPMG Peat Marwick LLP.

27                 Financial Data Schedule

                  (2) 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:

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.


                                       23




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)

                   (3)  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:


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.

                  (4) The following exhibits were 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 are incorporated herein by reference:

Exhibit
  No.                               Title
-------                             -----
10l(3)             Extension to the Massachusetts lease, dated June 23, 1995.


                                       24




                   (5)  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:

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.


                                       25




10o**              1993 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. See Item 2 listed in Item 14(a)(3) above.

(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.
     Not Applicable.

                                       26







                      APPLIED SCIENCE AND TECHNOLOGY, INC.


                                    INDEX TO
                              FINANCIAL STATEMENTS


         TITLE                                                              PAGE
         -----                                                              ----
Independent Auditors' Report                                                 F-2


Consolidated Balance Sheets as of June 28, 1997 and June 29, 1996            F-3


Consolidated Statements of Operations for the Years Ended
June 28, 1997, June 29, 1996, and July 1, 1995                               F-4


Consolidated Statements of Stockholders' Equity for the Years
June 28, 1997, June 29, 1996, and July 1, 1995                               F-5


Consolidated Statements of Cash Flows for the Years Ended
June 28, 1997, June 29, 1996, and July 1, 1995                               F-6


Notes to Consolidated Financial Statements                                   F-8





                                       24








              APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES

                        Consolidated Financial Statements

                         June 28, 1997 and June 29, 1996


                   (With Independent Auditors' Report Thereon)










                          INDEPENDENT AUDITORS' REPORT


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


We have audited the accompanying  consolidated balance sheets of Applied Science
and Technology, Inc. and subsidiaries as of June 28, 1997 and June 29, 1996, and
the related  consolidated  statements of operations,  stockholders'  equity, and
cash flows for each of the years in the  three-year  period ended June 28, 1997.
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 28, 1997 and June 29, 1996, and the
results  of their  operations  and their cash flows for each of the years in the
three-year  period ended June 28, 1997, in conformity  with  generally  accepted
accounting principles.



                                                      /s/  KPMG Peat Marwick LLP
                                                           KPMG Peat Marwick LLP


Boston, Massachusetts
July 30, 1997, except as to note 16,
   which is as of September 3, 1997



                                      F-2




                           APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES

                                          Consolidated Balance Sheets
<TABLE>
<CAPTION>
                                                                                         June 28,         June 29,
                   Assets                                                                  1997             1996
                   ------                                                                  ----             ----
<S>                                                                                <C>                <C>   
Current assets:
    Cash and cash equivalents                                                       $     3,246,337         5,182,294
    Short-term investments                                                                       -          1,990,962
    Trade receivables, net (notes 2, 3 and 8)                                            11,915,919         8,921,890
    Inventories (note 4)                                                                 10,013,422         8,734,401
    Prepaid expenses and other assets                                                       276,682           276,848
    Deferred income taxes (note 7)                                                          895,237           969,741
                                                                                     --------------   ---------------
              Total current assets                                                       26,347,597        26,076,136
                                                                                     --------------   ---------------

Property and equipment (note 10):
    Land                                                                                    473,000           473,000
    Building                                                                              1,621,469         1,606,947
    Equipment                                                                             7,871,718         7,068,802
    Furniture and fixtures                                                                  741,143           543,860
    Leasehold improvements                                                                1,946,800         1,455,977
                                                                                     --------------   ---------------
                                                                                         12,654,130        11,148,586
    Less accumulated depreciation and amortization                                       (5,150,881)       (3,458,407)
                                                                                     --------------   ---------------
              Net property and equipment                                                  7,503,249         7,690,179
                                                                                     --------------   ---------------

Other assets:
    Patents, net                                                                            148,794           141,525
    Goodwill, net of accumulated amortization
       of $55,282 (notes 11 and 14)                                                       3,261,652                -
    Long-term investments                                                                 1,299,545                -
    Notes receivable, less current maturities (notes 3 and 12)                              383,080           191,362
    Other, net                                                                              383,304           262,224
                                                                                     --------------   ---------------
              Total other assets                                                          5,476,375           595,111
                                                                                     --------------   ---------------

                                                                                    $    39,327,221        34,361,426
                                                                                     ==============   ===============
    Liabilities and Stockholders' Equity

Current liabilities:
    Current maturities of long-term debt (note 10)                                  $     1,824,397         1,624,641
    Accounts payable                                                                      3,869,521         2,564,149
    Accrued expenses                                                                      1,374,635           820,030
    Accrued compensation expense and related costs                                        1,448,928         1,428,759
    Accrued income taxes                                                                    647,142           173,179
    Commissions payable and customer advances                                               226,672           248,836
                                                                                     --------------   ---------------
              Total current liabilities                                                   9,391,295         6,859,594

Long-term debt, less current maturities (note 10)                                         6,368,913         6,169,517
Deferred income taxes (note 7)                                                               78,003            36,507
                                                                                     --------------   ---------------
              Total liabilities                                                          15,838,211        13,065,618
                                                                                     --------------   ---------------

Commitments and contingencies (notes 5, 9, 11 and 16)

Stockholders' equity (notes 6 and 11):
    Preferred stock                                                                              -                 -
    Common stock                                                                             45,190            44,484
    Additional paid-in capital                                                           27,859,845        26,690,108
    Accumulated deficit                                                                  (4,267,699)       (5,205,458)
    Less:  Notes receivable for common stock purchases                                     (148,326)         (233,326)
                                                                                     --------------   ---------------
              Total stockholders' equity                                                 23,489,010        21,295,808
                                                                                     --------------   ---------------

                                                                                    $    39,327,221        34,361,426
                                                                                     ==============   ===============
</TABLE>
See accompanying notes to consolidated financial statements.




                                      F-3





              APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES

                      Consolidated Statements of Operations

<TABLE>
<CAPTION>
                                                                                          Years ended
                                                                      -------------------------------------------------
                                                                         June 28,          June 29,          July 1,
                                                                           1997              1996             1995
                                                                           ----              ----             ----
<S>                                                                  <C>              <C>               <C> 
Product sales, net                                                   $    43,934,476       36,175,388        17,157,756
Research contract revenue                                                    982,383          894,517         2,138,332
Other revenue                                                              3,050,279        2,065,691           708,765
                                                                      --------------   --------------    --------------
         Total revenue (note 8)                                           47,967,138       39,135,596        20,004,853
                                                                      --------------   --------------    --------------

Cost of sales and revenue:
    Product sales and other revenues                                      30,052,877       22,924,311        10,868,160
    Research contracts                                                       504,357          439,659           945,072
                                                                      --------------   --------------    --------------
         Total cost of sales and revenue                                  30,557,234       23,363,970        11,813,232
                                                                      --------------   --------------    --------------

         Gross profit                                                     17,409,904       15,771,626         8,191,621
                                                                      --------------   --------------    --------------

Operating expenses:
    Selling expenses                                                       2,950,117        3,297,664         1,991,459
    General and administrative expenses                                    3,957,792        3,807,327         2,561,221
    Research and development expenses, net (note 1)                        7,343,190        5,043,189         2,839,986
    Acquisition-related expenses                                           1,500,000        2,887,647                -
    Write-off of goodwill (note 14)                                               -         6,813,562                -
                                                                      --------------   --------------    --------------
         Total operating expenses                                         15,751,099       21,849,389         7,392,666
                                                                      --------------   --------------    --------------

         Earnings (loss) from operations                                   1,658,805       (6,077,763)          798,955
                                                                      --------------   --------------    --------------

Other expense (income):
    Interest expense                                                         585,462          323,510               960
    Interest income                                                         (396,114)        (659,066)         (744,751)
    Other expense (income)                                                   (18,302)          13,568            13,998
                                                                      --------------   --------------    --------------
         Total other expense (income)                                        171,046         (321,988)         (729,793)
                                                                      --------------   --------------    --------------

         Earnings (loss) before income taxes                               1,487,759       (5,755,775)        1,528,748

Income tax expense (note 7)                                                  550,000        1,541,000           401,000
                                                                      --------------   --------------    --------------

         Net earnings (loss)                                         $       937,759       (7,296,775)        1,127,748
                                                                      ==============   ==============    ==============

Primary earnings (loss) per share                                    $          0.21            (1.74)              .29
                                                                      ==============   ==============    ==============

Fully diluted earnings (loss) per share                              $          0.19            (1.74)              .28
                                                                      ==============   ==============    ==============

Weighted average common shares outstanding used to
    calculate primary earnings (loss) per share                            4,518,293        4,204,764         3,906,800
                                                                      ==============   ==============    ==============

Weighted average common shares outstanding used to
    calculate fully diluted earnings (loss) per share                      4,829,114        4,204,764         3,992,100
                                                                      ==============   ==============    ==============
</TABLE>
See accompanying notes to consolidated financial statements.




                                      F-4





                         APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES

                            Consolidated Statements of Stockholders' Equity

                       Years ended June 28, 1997, June 29, 1996 and July 1, 1995

<TABLE>
<CAPTION>                                                                                                                     
                                                      Preferred stock               Common stock                 Additional      
                                               ---------------------------   -----------------------------        paid-in        
                                                Shares            Amount        Shares            Amount          capital        
                                                ------            ------        ------            ------          -------        
<S>                                           <C>             <C>            <C>              <C>             <C>   
Balance at July 2, 1994                             -          $      -       4,354,167        $   43,542      $ 21,224,387 
                                                                                                                                 

     Repurchase of common stock                     -                 -              -                 -                 -       
                                                                                                                                    

     Exercise of stock options                      -                 -           9,560                95            55,542      
                                                                                                                  

     Repayment of notes receivable                  -                 -              -                 -                 -       
                                                                                                                                   

     Net earnings                                   -                 -              -                 -                 -       
                                               ---------         ---------    ---------         ---------       -----------      
                                                                                                                          
                                                                                                                                 

Balance at July 1, 1995                             -                 -       4,363,727            43,637        21,279,929      
                                                                                                                                

     Retirement of treasury stock                   -                 -        (506,973)           (5,069)       (1,441,550)     
                                                                                                                                    

     Repayment of notes receivable                  -                 -              -                 -                 -       
                                                                                                                                 

     Issuance of notes receivable                   -                 -          18,000               180           236,570      
                                                                                                                                  

     Exercise of stock options and warrants         -                 -         233,587             2,336         1,996,397      
                                                                                                                               

     Tax benefit of stock options exercised         -                 -              -                 -            284,101      
                                                                                                                                   

     Stock issued in connection with
        acquisitions (note 11)                      -                 -         340,034             3,400         4,334,661      
                                                                                                                                  

     Net loss                                       -                 -              -                 -                 -       
                                               ---------         ---------    ---------         ---------       -----------      
                                                                                                                                   
                                                                                                                                 

Balance at June 29, 1996                            -                 -       4,448,375            44,484        26,690,108      
                                                                                                                                   

     Repayment of notes receivable                  -                 -              -                 -                 -       
                                                                                                                                   

     Canceled stock in exchange for cancella-
        tion of note receivable                     -                 -          (5,000)              (50)          (77,450)     
                                                                                                                                   

     Exercise of stock options                      -                 -          35,310               353           289,323      
                                                                                                                                   

     Tax benefit of stock options exercised         -                 -              -                 -             62,242      
                                                                                                                               

     Stock issued in connection with
        acquisition (note 11)                       -                 -          40,321               403           895,622      
                                                                                                                                  

     Net earnings                                   -                 -              -                 -                 -       
                                               ---------         ---------    ---------         ---------       -----------      
                                                                                                                                  
                                                                                                                                 

Balance at June 28, 1997                            -          $      -       4,519,006        $   45,190      $ 27,859,845      
                                               =========         =========    =========         =========       ===========      
                                                                                                                                 
</TABLE>
                                                                             




<TABLE>
<CAPTION>                                                                                                                     
                                                    Retained                                            Notes          
                                                    earnings            Treasury stock              receivable for         Total    
                                                  (accumulated   ----------------------------        common stock      stockholders'
                                                    deficit)       Shares            Amount           purchases           equity
                                                    --------       ------            ------           ---------           ------
<S>                                               <C>            <C>            <C>                 <C>                <C>   
Balance at July 2, 1994                           $    963,569     286,435      $   (33,255)         $  (94,500)        $22,103,743
                                                                                                                             

     Repurchase of common stock                             -      220,538       (1,413,364)                 -           (1,413,364)
                                                                                                                                 

     Exercise of stock options                              -           -                -                   -               55,637
                                                                                                                                  

     Repayment of notes receivable                          -           -                -               20,000              20,000
                                                                                                                                    

     Net earnings                                    1,127,748          -                -                   -            1,127,748
                                                   -----------    --------        ---------           ---------          ----------
                                                                                                                                   
                                                                                                                       

Balance at July 1, 1995                              2,091,317     506,973       (1,446,619)            (74,500)         21,893,764
                                                                                                                                   

     Retirement of treasury stock                           -     (506,973)       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 11)                              -           -                -                   -            4,338,061
                                                                                                                                   

     Net loss                                       (7,296,775)         -                -                   -           (7,296,775)
                                                   -----------    --------       ----------           ---------          ----------
                                                                                                                                   
                                                                                                        

Balance at June 29, 1996                            (5,205,458)         -                -             (233,326)         21,295,808
                                                                                                                                  

     Repayment of notes receivable                          -           -                -                7,500               7,500
                                                                                                                                  

     Canceled stock in exchange for cancella-
        tion 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 11)                               -           -                -                   -              896,025
                                                                                                                                   

     Net earnings                                      937,759          -                -                   -              937,759
                                                   -----------    --------        ---------           ---------          ----------
                                                                                                                                   
                                                                                               

Balance at June 28, 1997                          $ (4,267,699)         -        $       -           $ (148,326)        $23,489,010
                                                   ===========    ========        =========           =========          ==========
                                                                                                                    
</TABLE>

See accompanying notes to consolidated financial statements.





                                      F-5





                           APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES

                                    Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
                                                                                           Years ended
                                                                    ---------------------------------------------------
                                                                          June 28,           June 29,           July 1,
                                                                            1997               1996              1995
                                                                            ----               ----              ----
<S>                                                                  <C>                 <C>               <C> 
Cash flows from operating activities:
    Net earnings (loss)                                                $   937,759         (7,296,775)        1,127,748
    Adjustments to reconcile net earnings (loss) to net
       cash provided by operating activities:
          Depreciation                                                   1,824,739          1,335,634           715,542
          Amortization and goodwill write-off                              117,164          7,129,418            87,076
          Acquisition-related expenses                                   1,500,000          2,203,000                -
          Deferred income taxes                                           (439,000)          (143,000)          (68,438)
          Gain on sale of property and equipment                                -                 -             (12,625)
          Equipment transferred to inventories                             114,419                -                  -
          Changes in assets and liabilities:
              Trade receivables                                         (1,739,367)        (1,112,739)       (1,394,413)
              Inventories                                                  146,391         (1,117,125)         (401,073)
              Prepaid expenses and other assets                             41,036            474,325            (4,136)
              Notes receivable                                             373,304            154,524          (187,267)
              Accounts payable                                             785,299            (76,810)          302,944
              Accrued expenses                                             188,022         (1,060,162)          358,759
              Accrued income taxes                                         536,205            228,445                -
                                                                    --------------     --------------    --------------
                 Net cash provided by
                       operating activities                              4,385,971            718,735           524,117
                                                                    --------------     --------------    --------------

Cash flows from investing activities:
    Acquisitions of subsidiaries, less cash acquired                    (6,482,933)       (12,318,331)               -
    Purchases of investments                                            (1,299,102)        (3,006,211)      (14,230,097)
    Sales of investments                                                 1,990,519         11,241,904         4,758,220
    Additions to property and equipment                                 (1,029,908)        (2,812,968)       (1,434,125)
    Patent costs                                                           (57,005)           (81,974)          (49,412)
    Proceeds from sale of property and equipment                                -                  -            106,000
    Investment in other assets                                            (139,827)          (250,000)               -
                                                                    --------------     --------------    --------------
                 Net cash used for investing
                       activities                                       (7,018,256)        (7,227,580)      (10,849,414)
                                                                    --------------     --------------    --------------

Cash flows from financing activities:
    Proceeds from notes payable                                          4,983,050          8,000,000                -
    Repayments of notes payable                                         (4,583,898)          (689,163)               -
    Repayment of notes receivable for common
       stock purchases                                                       7,500             77,924            20,000
    Net proceeds from issuance of common stock                             289,676          1,998,733            55,637
    Repurchase of treasury stock                                                -                 -          (1,413,364)
                                                                    --------------     --------------    --------------
                 Net cash provided by (used for)
                       financing activities                                696,328          9,387,494        (1,337,727)
                                                                    --------------     --------------    --------------

Net increase (decrease) in cash and cash equivalents                    (1,935,957)         2,878,649       (11,663,024)

Cash and cash equivalents at beginning of year                           5,182,294          2,303,645        13,966,669
                                                                    --------------     --------------    --------------

Cash and cash equivalents at end of year                           $     3,246,337          5,182,294         2,303,645
                                                                    ==============     ==============    ==============

                                                                                                            (Continued)
</TABLE>


                                      F-6





                           APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES

                                    Consolidated Statements of Cash Flows

                                                 (Continued)
<TABLE>
<CAPTION>
                                                                                           Years ended
                                                                    ---------------------------------------------------
                                                                          June 28,           June 29,           July 1,
                                                                            1997               1996              1995
                                                                            ----               ----              ----
<S>                                                                <C>                <C>               <C>  
Supplemental  disclosures  of cash flow  information:  
    Cash paid during the year for:
       Interest                                                    $       538,893            276,347               960
                                                                    ==============     ==============    ==============
       Income taxes                                                $       453,567          1,470,555           425,154
                                                                    ==============     ==============    ==============

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

              Net cash paid for acquisitions                       $     6,482,933         12,318,331                -
                                                                    ==============     ==============    ==============

</TABLE>

See accompanying notes to consolidated financial statements.




                                      F-7




              APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                         June 28, 1997 and June 29, 1996


(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  for plasma  processing  of materials and for
           medical  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"),  and  Newton  Engineering  Service,  Inc.
           ("NES"). 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 commercial  paper at June 28, 1997.  Prior to June 28, 1997, cash
           equivalents and short-term  investments  consisted of corporate bonds
           and notes, government agency bonds, and commercial paper. The Company
           uses an  investment  firm to manage  its  investment  portfolio.  All
           investments mature within a two-year period.

       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.

       During  1996,  the  Company  sold  held-to-maturity  securities  with  an
           amortized cost of $3,012,500  prior to their maturity dates. The sale
           of  these   securities   prior  to  their   maturities   was  due  to
           unanticipated cash requirements resulting from the acquisition of ETO
           (see note 11).

       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.

                                                                     (Continued)



                                      F-8




              APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


       (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 a 10 year  period.  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 14).

       (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.

       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 28,         June 29,           July 1,
                                                                          1997             1996              1995
                                                                          ----             ----              ----
           <S>                                                     <C>                <C>               <C> 
           Research and development costs ..................       $     8,195,367        6,429,083         3,150,284
           Less funding ....................................               852,177        1,385,894           310,298
                                                                    --------------    -------------     -------------

               Net research and development costs ..........       $     7,343,190        5,043,189         2,839,986
                                                                    ==============    =============     =============

                                                                                                          (Continued)
</TABLE>


                                      F-9


   

              APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


       (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
       Net earnings  (loss) per share is computed based on the weighted  average
           number of common shares outstanding during each period,  after giving
           effect to stock options,  warrants and unconverted  preferred  shares
           considered to be dilutive common stock  equivalents.  These items are
           not included when their effect is anti-dilutive.

       (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 1996  impairment  of
           goodwill and reserves for excess inventories.  Management  determined
           the 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 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 short- and long-term investments approximate fair
           value based on quoted market prices.

                                                                     (Continued)


                                      F-10




              APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


       The carrying   amounts  of  the  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 was applied, are presented.

       The Company adopted Statement 123 effective June 30, 1996 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 was applied are
           presented in note 6.

       (p) Long-Lived Assets
       In  1997,  the  Company  adopted  Financial  Accounting  Standards  Board
           Statement No. 121, Accounting for the Impairment of Long-Lived Assets
           and for  Long-Lived  Assets  to be  Disposed  Of  ("Statement  121").
           Statement 121 establishes  accounting standards for the impairment of
           long-lived assets,  certain  identifiable  intangibles,  and goodwill
           related to (1) those assets to be held and used in the business,  and
           (2) for assets to be disposed of. The  adoption of Statement  121 had
           no effect on the Company's consolidated financial statements.

       (q) Reclassifications
       Certain 1996 and 1995 account balances have been  reclassified to conform
           to the 1997 presentation.

(2)    TRADE AND NOTES RECEIVABLE

       Trade and notes receivable consist of the following:
<TABLE>
<CAPTION>
                                                                    June 28,         June 29,
                                                                      1997             1996
                                                                      ----             ----
           <S>                                                 <C>               <C>    
           Trade receivables                                     $  11,857,598         9,115,345
           Notes receivable, current portion (see note 3) .....        384,663           158,754
           Allowance for doubtful accounts ....................       (326,342)         (352,209)
                                                                 -------------     -------------

                                                                 $  11,915,919         8,921,890
                                                                 =============     =============

                                                                                     (Continued)
</TABLE>

                                      F-11






              APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


(3)    NOTES RECEIVABLE

       Notes receivable consist of the following:
<TABLE>
<CAPTION>
                                                                                            June 28,        June 29,
                                                                                              1997            1996
                                                                                              ----            ----
         <S>                                                                           <C>                <C> 
           Note receivable  from  stockholder  with  interest  at 8% per  annum,
                payable in  principal  installments  of $336,338 and $228,684 in
                1998 and 1999, respectively, plus interest, due in August, 1999.
                The note is secured by certificates of deposit. .......................  $    565,022            -

           Note receivable  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. ..       160,181         168,808

           Unsecured note receivable with interest at 13% per annum,  payable in
                monthly installments of $14,488, including interest, due August, 1997.         42,540         181,308
                                                                                          -----------     -----------
                                                                                              767,743         350,116
           Less current maturities ....................................................       384,663         158,754
                                                                                          -----------     -----------

           Long-term notes receivable .................................................  $    383,080         191,362
                                                                                          ===========     ===========
</TABLE>

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

(4)    INVENTORIES

       Inventories consist of the following:
<TABLE>
<CAPTION>
                                                                                            June 28,        June 29,
                                                                                              1997            1996
                                                                                              ----            ----
          <S>                                                                           <C>             <C>        
           Raw materials ..............................................................  $  6,566,718       5,630,926
           Work in process ............................................................     2,534,245       2,249,579
           Finished goods .............................................................       912,459         853,896
                                                                                          -----------     -----------

                                                                                         $ 10,013,422       8,734,401
                                                                                          ===========     ===========

                                                                                                          (Continued)
</TABLE>

                                      F-12





              APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


(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:
                       1998 ........................    $      920,713
                       1999 ........................           814,679
                       2000 ........................           789,272
                       2001 ........................            36,272
                                                         -------------
                                                        $    2,560,936
                                                         =============

       Rent expense totaled $761,710,  $548,259 and $356,207 for the years ended
           June 28, 1997, June 29, 1996 and July 1, 1995, respectively.


(6)    STOCKHOLDERS' EQUITY

       Capital stock  consists  of the  following  at June 28, 1997 and June 29,
           1996:
<TABLE>
<CAPTION>
                                                                                                 Number of shares
                                                                                              issued and outstanding
                                                                                       ---------------------------------
                                                                        Authorized       June 28, 1997     June 29, 1996
                                                                   ---------------     ---------------   ---------------
<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 ...................         10,000,000           4,519,006         4,448,375
                                                                   ---------------     ---------------   ---------------
                     Total common stock .......................         10,000,000           4,519,006         4,448,375
                                                                   ---------------     ---------------   ---------------

                     Total capital stock ......................         11,000,000           4,519,006         4,448,375
                                                                   ===============     ===============   ===============
</TABLE>


       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.

                                                                     (Continued)

                                      F-13





              APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


       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 1,700,050 shares of common stock at
           $10.75  per  share  and  1,955,000  redeemable  warrants  at $.10 per
           warrant.  Two redeemable  warrants entitle the holder to purchase one
           share of common stock at $15.05 through November 9, 1998,  subject to
           adjustment  in  accordance   with   anti-dilution   provisions.   The
           redeemable  warrants are subject to redemption at $.10 per warrant on
           30 days' prior notice, provided that the average closing price of the
           Company's  common stock equals or exceeds  $19.35 for 20  consecutive
           trading days through November 9, 1998. See note 16.

       The Company  also  issued  to the  underwriter  of the IPO,  for  nominal
           consideration,  warrants to purchase  170,000  shares of common stock
           and 170,000 redeemable  warrants (the  "Representative's  warrants").
           The Representative's warrants are initially exercisable at $15.59 per
           share of common stock and $.145 per  redeemable  warrant for a period
           of four years commencing November 10, 1994.

       In  connection  with the issuance of preferred stock in 1992, the Company
           issued  warrants to purchase  193,363 shares of common stock.  During
           fiscal 1996,  159,237 warrants were exercised at $9.60 per share. The
           remaining warrants expired in November 1996.

       The Company  adopted  the  1993  Stock  Option  Plan in  fiscal  1994 and
           reserved  250,000 shares of common stock for issuance under the Plan.
           In fiscal 1995,  the Company  adopted the 1994  Formula  Stock Option
           Plan to award non-employee directors of the Company stock options and
           has  reserved  100,000  shares for issuance  under this plan.  During
           fiscal 1996,  the Company  reserved an additional  495,000 shares for
           the 1993  Stock  Option  Plan.  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.

                                                                     (Continued)

                                      F-14




              APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


       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 28,         June 29,
                                                                      1997             1996
                                                                      ----             ----
          <S>                                                    <C>              <C> 
           Net earnings (loss) as reported                        $    937,759        (7,296,775)
                                                                   ===========     =============
           Pro forma net earnings (loss)                          $    225,740        (7,841,368)
                                                                   ===========     =============

           Net earnings (loss) per share as reported              $       0.21             (1.74)
                                                                   ===========     =============
           Pro forma net earnings (loss) per share                $       0.05             (1.83)
                                                                   ===========     =============
</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 1997
           and 1996,  respectively:  no dividend yield for both years;  expected
           volatility of 75% for both years;  risk-free interest rates of 6% for
           both years;  and expected  lives of 3 to 4 years for grants issued in
           1997 and 4 to 8 years for grants issued in 1996.

       The following is a summary of stock option activity:

<TABLE>
<CAPTION>

                                                                                     Employee stock options
                                                                        -----------------------------------------------
                                                                           Option                           Weighted
                                                                           shares           Options         Average
                                                                          available      outstanding     Exercise Price
                                                                          ---------      -----------     --------------

          <S>                                                           <C>             <C>             <C>         
           Balance at July 2, 1994                                           243,500        181,605      $       6.49
               Adoption of plan                                              100,000             -                 -
               Options granted                                               (52,150)        52,150              7.70
               Options exercised                                                  -          (9,560)             5.82
               Options expired                                                29,165        (29,165)             6.78
                                                                         -----------    -----------

           Balance at July 1, 1995                                           320,515        195,030              6.32
               Options added                                                 495,000             -                 -
               Options granted                                              (364,050)       364,050             12.77
               Options exercised                                                  -         (74,350)             6.34
               Options expired                                                 7,350         (7,350)             8.47
                                                                         -----------    -----------

           Balance at June 29, 1996                                          458,815        477,380             11.09
               Options granted                                              (232,725)       232,725              9.69
               Options exercised                                                  -         (35,310)             8.20
               Options expired                                                32,512        (32,512)            10.69
                                                                         -----------    -----------

           Balance at June 28, 1997                                          258,602        642,283             10.76
                                                                         ===========    ===========

</TABLE>

                                                                     (Continued)



                                      F-15





              APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


       The weighted-average fair value of options granted during fiscal 1997 and
           1996 was $5.75 and $8.25, respectively.  As of June 28, 1997 and June
           29,  1996,  262,828  and  140,103  of the  outstanding  options  were
           exercisable, respectively.

       The  following  is a summary of  information  relating  to stock  options
outstanding at June 28, 1997:

<TABLE>
<CAPTION>

                                               Options Outstanding                            Options Exercisable
                                      -----------------------------------                 --------------------------
                                        Number                                Weighted-      Number         Weighted-
                                      Outstanding         Weighted-            Average     Exercisable       Average
                     Range of           at June       Average Remaining       Exercise       at June        Exercise
                  Exercise Prices      28, 1997       Contractual Life          Price       28, 1997          Price
                  ---------------      --------       ----------------          -----       --------          -----

             <S>                     <C>               <C>                <C>             <C>             <C>                    
              $        5.00-7.88          100,290         2.6 years       $       6.63         72,116     $      6.63
                      8.00-10.63          202,423         3.9                     9.46         53,492            9.27
                     11.13-13.50          279,070         3.4                    12.06        102,120           12.09
                     15.88-16.00           60,500         7.3                    16.00         35,100           16.00
                                      -----------                                         -----------

                                          642,283         3.8                    10.76        262,828           10.54
                                      ===========                                         ===========
</TABLE>

       In  March  1993,  the Company  issued  21,750  shares of common  stock in
           exchange for notes  receivable from employees  totaling  $87,000.  In
           1996, the remaining outstanding balances of $67,000 were repaid.

       In  July  1995,  the  Company  issued  9,000  shares of  common  stock in
           exchange for notes  receivable from employees of $101,250.  The notes
           and related interest are to be repaid upon the earlier of (a) July 2,
           2000,  or (b) one month from the date of  termination  of  employment
           with the  Company.  Interest  accrues  at 6.28%  per  year.  In 1996,
           $10,924 of these notes were repaid.

       In  August  1995,  the Company  issued  5,000  shares of common  stock in
           exchange for a note receivable from an employee of $77,500.  In 1997,
           all of the shares were returned and the note receivable was canceled.

       In  October  1995,  the Company  issued  4,000  shares of common stock in
           exchange for notes  receivable  from employees of $58,000.  The notes
           and related interest are to be repaid upon the earlier of (a) October
           9, 2000 or (b) one month from the date of  termination  of employment
           with the Company. Interest accrues at 6.28% per year.


                                                                     (Continued)


                                      F-16





              APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

(7)    INCOME TAXES

       Income tax expense (benefit) consists of the following:

<TABLE>
<CAPTION>

                                                                               Years ended                                     
                                                                -----------------------------------------
                                                                  June 28,        June 29,         July 1,
                                                                    1997            1996            1995
                                                                    ----            ----            ----
           <S>                                                 <C>            <C>            <C>  
           Current:                                           
               Federal                                          $   775,000      1,500,000        369,000
               State                                                214,000        184,000        100,000
                                                                -----------    -----------    -----------
                     Total current                                  989,000      1,684,000        469,000
                                                                -----------    -----------    -----------
                                                              
           Deferred:                                          
               Federal                                             (294,000)      (123,000)       (52,000)
               State                                               (145,000)       (20,000)       (16,000)
                                                                -----------    -----------    -----------
                     Total deferred                                (439,000)      (143,000)       (68,000)
                                                                -----------    -----------    -----------
                                                              
                                                                $   550,000      1,541,000        401,000
                                                                ===========    ===========    ===========
                                    
</TABLE>

       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 28,        June 29,         July 1,
                                                                     1997            1996            1995
                                                                     ----            ----            ----

          <S>                                                    <C>             <C>               <C>    
           Computed "expected" tax expense (benefit)              $   505,838     (1,956,964)       519,774
           Increase (reduction) in income taxes resulting from:
               State taxes, net of federal benefit                     45,540        108,783         66,197
               Goodwill amortization and write-off                       --        2,396,649           --
               Acquisition related expenses                              --          981,800           --
               Research and experimentation tax credit                (44,000)      (133,000)      (111,852)
               Valuation reserve movement                                --             --          (83,936)
               Other                                                   42,622        143,732         10,817
                                                                  -----------    -----------    -----------

                                                                  $   550,000      1,541,000        401,000
                                                                  ===========    ===========    ===========
</TABLE>

       Total income tax expense was allocated as follows:
<TABLE>
<CAPTION>

                                                                                   Years ended
                                                                     ------------------------------------
                                                                      June 28,     June 29,          July 1,
                                                                        1997         1996             1995
                                                                        ----         ----             ----

           <S>                                                    <C>              <C>               <C>    
           Income from operations                                 $      550,000   1,541,000         401,000

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

                                                                  $      487,758   1,256,899         401,000
                                                                     =========== ===========     ===========
</TABLE>

                                                                     (Continued)


                                      F-17



              APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


       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 28,         June 29,
                                                                                           1997             1996
                                                                                           ----             ----
          <S>                                                                   <C>                      <C>
           Deferred tax assets:
               Net operating loss carryforwards                                    $        881,558         1,042,407
               Accrued liabilities                                                          271,797           359,906
               Inventory reserves                                                           547,934           454,755
               Accounts receivable, principally due to allowance for
                  doubtful accounts                                                         128,249           155,080
                                                                                      -------------     -------------
                        Total deferred tax assets                                         1,829,538         2,012,148

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

                        Net deferred tax assets                                    $      1,559,538         1,742,148
                                                                                      =============     =============

           Deferred tax liabilities:
               Property and equipment, principally due to differences
                  in depreciation methods                                          $        742,304           808,914
                                                                                      =============     =============
</TABLE>

       There was no change in the  valuation  allowance  for the year ended June
           28, 1997.  The valuation  allowance is  principally  attributable  to
           state loss carryforwards.

       At  June 28,1997,  the Company has net operating loss  carryforwards  for
           federal  income tax purposes of  approximately  $1,800,000  which are
           available to offset future taxable  income through 2010.  Utilization
           of the net  operating  loss  carryforwards  is  subject  to an annual
           limitation  of $1,002,000  under Section 382 of the Internal  Revenue
           Code.

       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)    SALES AND REVENUE

       Total revenue  consists of product sales,  research  contract revenue and
           other revenue.  Other revenue  includes funded contracts for research
           and  development,  revenues  from service and repair  activities  and
           consulting.  Sales and revenue to  government  agencies for the years
           ended June 28,  1997,  June 29, 1996 and July 1, 1995 were  $876,636,
           $662,471 and $1,249,498,  respectively. At June 28, 1997 and June 29,
           1996 accounts  receivable from these customers  totaled  $581,027 and
           $516,698, respectively.

       One commercial  customer  accounted for 38%, 45% and 41% of total revenue
           for the years  ended June 28,  1997,  June 29, 1996 and July 1, 1995,
           respectively. At June 28, 1997 and June 29, 1996, accounts receivable
           from this customer totaled  $3,919,586 and $2,726,198,  respectively.
           In 1997, a second customer  accounted for  approximately 10% of total
           revenue.

                                                                     (Continued)


                                      F-18






              APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


       Sales to  customers  in foreign  countries  for the years  ended June 28,
           1997, June 29, 1996 and July 1, 1995 were $10,082,704, $7,328,015 and
           $3,028,541,  respectively.  At June  28,  1997  and  June  29,  1996,
           accounts  receivable  from these  customers  totaled  $1,764,059  and
           $1,776,569, respectively.

(9)    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 28, 1997).  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  of 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 28, 1997 and June 29, 1996.  The line
           of credit expires in May 2000.

(10) LONG-TERM DEBT

       Long-term debt consists of the following:
<TABLE>
<CAPTION>

                                                                                         June 28,         June 29,
                                                                                           1997             1996
                                                                                           ----             ----
           <S>                                                                    <C>                     <C>
           Notepayable  to bank,  payable  in  monthly  installments  of  $5,415
               including interest, with any remaining balance due in July, 1999.
               The interest  rate is adjusted  annually to the bank's prime rate
               with a maximum  change of 1% annually  (8.75% at June 28,  1997).
               The note is secured
               by land and building.                                               $        445,853           472,124

           Unsecured note payable to bank with interest at the bank's prime rate
               (8.5% at June 28, 1997) payable in monthly principal installments
               of $83,051, plus
               interest, due June 30, 2002.                                               4,900,000                -

           Unsecured note  payable  to bank with  interest  at the bank's  prime
               rate. In 1997,  the remaining  principal was repaid in connection
               with the issue of the note
               payable due June 30, 2002.                                                        -          3,661,017

           Unsecured note  payable to bank with  interest  at 7.19%,  payable in
               monthly  principal  installments of $67,797,  plus interest,  due
               December 31, 2000.  This note is subject to a prepayment  penalty
               equal to the lender's lost net interest income resulting from any
               prepayment
               as defined in the loan agreement.                                          2,847,457         3,661,017
                                                                                      -------------     -------------
                                                                                          8,193,310         7,794,158

           Less current maturities                                                        1,824,397         1,624,641
                                                                                      -------------     -------------

                     Long-term debt, excluding current maturities                  $      6,368,913         6,169,517
                                                                                      =============     =============
</TABLE>

                                                                     (Continued)


                                      F-19






              APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


         The aggregate maturities of long-term debt are as follows:

              Year ending June 30:
                 1998 ...................................    $      1,824,397
                 1999 ...................................           1,825,344
                 2000 ...................................           2,185,924
                 2001 ...................................           1,444,061
                 2002 ...................................             913,584
                                                             ----------------
                                                             $      8,193,310
                                                             ================

       No  security  pledges of assets can be granted nor dividends paid without
           the approval of the bank that issued the unsecured notes payable.

       Certain financial  covenants must be tested  quarterly in connection with
           the unsecured  notes payable.  The Company is in compliance  with all
           covenants at June 28, 1997.

(11) ACQUISITIONS

       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.

       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 reserves  while  $2,067,796
           was provided from  increased  bank  borrowings,  and 40,321 shares of
           common  stock  valued at $896,025  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 is 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. If the shares do not have a market value of at least
           $896,025 (prior to  adjustments)  on May 8, 1998,  ASTeX will pay the
           difference in cash,  common stock of ASTeX,  or a combination of both
           at its discretion.

       As  of 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
           reserves  while  the  remaining  $8,000,000  was  provided  from  two
           unsecured  notes  from a bank (see note 10),  and  328,662  shares of
           common stock valued at $4,149,358  issued to the former  shareholders
           of ETO.  Costs  associated  with  acquired  in-process  research  and
           development were charged to expense.
                                                                     (Continued)



                                      F-20






              APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


       On  November 21, 1995,  the Company  completed its  acquisition of Newton
           Engineering Service,  Inc. and acquired all of the outstanding shares
           of NES. In connection with the acquisition, the Company issued 11,372
           shares of common stock valued at $188,703 to the former  shareholders
           of NES.

       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 28, 1997         June 29, 1996
                                                                                  -------------         -------------
          <S>                                                               <C>                       <C>
           Consideration paid:
               Cash                                                           $        6,482,933           12,600,000
               Common stock (40,321 shares in 1997
                  and 340,034 shares in 1996)                                            896,025            4,338,061
                                                                                  --------------      ---------------

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

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

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


       The following  unaudited pro forma  results of operations  give effect to
           the  acquisitions as if the NES and ETO  acquisitions had occurred at
           the beginning of fiscal 1995 and the CPI  acquisition 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.
<TABLE>
<CAPTION>

                                                                                      Years ended
                                                               ------------------------------------------------------
                                                                     June 28,           June 29,           July 1,
                                                                       1997               1996              1995
                                                                       ----               ----              ----
                                                                                      (Unaudited)
                                                               ------------------------------------------------------

<S>                                                            <C>                  <C>               <C>       
           Pro forma total revenue ........................    $      55,200,669         60,577,113        31,879,730
                                                                  ==============     ==============   ===============

           Pro forma net earnings .........................    $       1,123,257          3,084,909           897,888
                                                                  ==============     ==============   ===============

           Pro forma net primary earnings per share .......    $            0.25               0.68              0.21
                                                                  ==============     ==============   ===============

           Pro forma weighted average common
               shares outstanding .........................            4,552,965          4,567,518         4,320,762
                                                                  ==============     ==============   ===============

</TABLE>


                                                                     (Continued)



                                      F-21




              APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


(12) TRANSACTION WITH STOCKHOLDER

       In  1997,  the  Company  sold  certain  assets  with a cost  of  $565,022
           consisting  of the  net  assets  of  ETO's  Alpha  product  line,  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.

(13) NONCASH FINANCING AND INVESTING ACTIVITIES

       During the years  ended  June 29,  1997 and June 28,  1996,  the  Company
           issued  40,321 and 340,034  shares of common stock valued at $896,025
           and $4,338,061, respectively, in connection with acquisitions. During
           the year ended June 29, 1997, the Company  received a note receivable
           from a stockholder  in the amount of $565,022 in connection  with the
           sale of the net assets of ETO's Alpha Product line.

       During the year ended June 29, 1996,  the Company issued 18,000 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
           $62,242 and $284,101 was recorded as additional  paid-in  capital for
           the years ended June 29, 1997 and June 28, 1996, respectively.

(14) 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  28,  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,
           which  occurred  during the Company's  fourth quarter of fiscal 1996,
           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 as of the reassessment date.

                                                                     (Continued)


                                      F-22



              APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


(15) 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  $110,214,  $72,547 and $42,673 for the
           years  ended  June  28,  1997,  June  29,  1996  and  July  1,  1995,
           respectively.

(16) SUBSEQUENT EVENTS

       In  August  1997,  the  Company  signed a binding  agreement  to  acquire
           certain assets and assume certain liabilities of a German company for
           approximately $4,000,000. The purchase price is to be paid in cash at
           closing,  subject to adjustment.  The Company has adequate  financial
           resources to complete  the  acquisition  within its  existing  credit
           facilities.

       On  September  3,  1997,  the  Company  announced  that  it had  met  the
           requirement  for  redemption  of the  1,955,000  redeemable  warrants
           issued in  connection  with the  Company's IPO (see note 6) and would
           call the warrants for redemption.

(17) QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>


                                                                  (In thousands except per share data)
                                              -----------------------------------------------------------------------
                                                                                                                 Net
                                                                                Earnings         Net         Earnings
                                                    Total           Gross      (Loss) From     Earnings       (Loss)
                                                    Revenue        Profit      Operations       (Loss)       Per Share
                                                    -------        ------      ----------       ------       ---------

          <S>                                 <C>                <C>            <C>            <C>          <C>
           1997
           First Quarter ...................   $       9,860         3,813          536            312          0.07
           Second Quarter ..................           9,293         3,395          461            280          0.06
           Third Quarter ...................          11,013         3,886          658            390          0.09
           Fourth Quarter ..................          17,801         6,316            3            (44)        (0.01)

           Year ended June 28 ..............          47,967        17,410        1,658            938          0.21

           1996
           First Quarter ...................   $       5,639         2,123          232            299          0.07
           Second Quarter ..................           6,859         2,944       (2,358)        (2,394)        (0.57)
           Third Quarter ...................          12,681         4,974        1,183            725          0.16
           Fourth Quarter ..................          13,956         5,731       (5,135)        (5,927)        (1.34)

           Year ended June 29 ..............          39,135        15,772       (6,078)        (7,297)        (1.74)

</TABLE>

                                                                     (Continued)



                                      F-23





              APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


(18) NEW ACCOUNTING PRONOUNCEMENTS

       Statement of Financial  Accounting  Standards  (SFAS)  Statement No. 128,
           Earnings Per Share, will become effective during fiscal year 1998. At
           that time,  the  Company  will be  required  to exclude the effect of
           dilutive common stock equivalents from its primary earnings per share
           calculation  and restate all prior periods on that basis.  The effect
           of  implementation  of  this  new  standard  is  not  expected  to be
           material.

       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.

       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.

       The Company is evaluating the impact of Statement Nos. 130 and 131.




                                      F-24






                                   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 26, 1997                    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.

<TABLE>
<CAPTION>

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

<S>                                 <C>                                       <C>
/s/ Richard S. Post                       Chairman of the Board, Chief            September 26, 1997
Richard S. Post                           Executive Officer and President
                                          (principal executive officer)


/s/ John M. Tarrh                         Chief Financial Officer, Senior         September 26, 1997
------------------------------            Vice President of Finance          
John M. Tarrh                             (principal financial and accounting
                                          officer) and Director              
                                          


/s/ Donald K. Smith                       Director                                September 26, 1997
------------------------------
Donald K. Smith


/s/ John R. Bertucci                      Director                                September 26, 1997
------------------------------
John R. Bertucci


/s/ Michel de Beaumont                    Director                                September 26, 1997
------------------------------
Michel de Beaumont


/s/ Robert R. Anderson                    Director                                September 26, 1997
------------------------------
Robert R. Anderson


/s/ Hans-Jochen Kahl                      Director                                September 26, 1997
------------------------------
Hans-Jochen Kahl
</TABLE>