##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q

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|(Mark One)                                               
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|[ X]                                                      |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 
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|                                                          |  | EXCHANGE ACT OF 1934                                               
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|For the quarterly period ended September 30, 2002        
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|                                                          |  | OR                                                                 
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|[   ]                                                     |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
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|                                                          |  | EXCHANGE ACT OF 1934                                               
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|For the transition period from ___________ to ___________

Commission File Number 000-30637



AUGUST TECHNOLOGY CORPORATION
(Exact name of Registrant as specified in its charter)

|                                                                               |  |                                                
|------------------------------------------------------------------------------ |  | -----------------------------------------------
|Minnesota
(State or other jurisdiction of
incorporation or organization)       |  | 41-1729485
(I.R.S. Employer
Identification No.)
|                                                                              
|                                                                              
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|                                                                               |  |                                                
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|4900 West 78th Street
Bloomington, MN
(Address of principal executive offices) |  | 55435
(Zip Code)                               

(952) 820-0080
(Registrants telephone number, including area code)

N/A
(Former name, former address, and former fiscal year, if changed since last report.)

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]

As of October 31, 2002, there were 13,129,969 shares of common stock
outstanding.





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TABLE OF CONTENTS



|                                                   |                                                                                               |                                            |  |  |  |  |  | 
|-------------------------------------------------- | --------------------------------------------------------------------------------------------- | ------------------------------------------ |  |  |  |  |  | 
|PART I  FINANCIAL INFORMATION                     
|                                                   | Item 1. Financial Statements                                                                 
|                                                   |                                                                                               | CONSOLIDATED BALANCE SHEETS               
|                                                   |                                                                                               | CONSOLIDATED STATEMENTS OF OPERATIONS     
|                                                   |                                                                                               | CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                                                   |                                                                                               | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                                   | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                                   | Item 3. Qualitative and Quantitative Disclosures about Market Risk                           
|                                                   | Item 4. Controls and Procedures                                                              
|PART II  OTHER INFORMATION                       
|                                                   | Item 1. Legal Proceedings                                                                    
|                                                   | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                                        
|CERTIFICATIONS                                    
|EX-10.1 Executive Employment Agreement-S. Gabbard 
|EX-10.2 Definitive Agreement with ASTI Holdings   
|EX-99.1 Certification Pursuant to 18 USC Sec. 1350



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##### Table of Contents



AUGUST TECHNOLOGY CORPORATION
TABLE OF CONTENTS

|               |  |                                                                                       |    |             |                                                                                                                   |      |  |   | 
|-------------- |  | ------------------------------------------------------------------------------------- | -- | ----------- | ----------------------------------------------------------------------------------------------------------------- | ---- |  | - | 
|               |  |                                                                                       |    | Description |                                                                                                                   | Page
|               |  |                                                                                       |    |             |                                                                                                                   |     
|PART I         |  | FINANCIAL INFORMATION                                                                 |    |             |                                                                                                                   |     
|              
|              
|              
|              
|Item 1.        |  | Financial Statements                                                                  |    |             |                                                                                                                   |     
|              
|              
|              
|              
|               |  |                                                                                       |    |             | Consolidated Balance Sheets as of September 30, 2002 and
December 31, 2001 (unaudited)                            |      |  | 3 | 
|              
|              
|              
|              
|               |  |                                                                                       |    |             | Consolidated Statements of Operations for the three and nine
months ended September 30, 2002 and 2001 (unaudited) |      |  | 4 | 
|              
|              
|              
|              
|               |  |                                                                                       |    |             | Consolidated Statements of Cash Flows for the nine months ended
September 30, 2002 and 2001 (unaudited)           |      |  | 5 | 
|              
|              
|              
|              
|               |  |                                                                                       |    |             | Notes to Consolidated Financial Statements (unaudited)                                                            |      |  | 6 | 
|              
|              
|              
|              
|Item 2.        |  | Managements Discussion and Analysis of Financial Condition
and Results of Operations |    |             | 10                                                                                                                |     
|              
|              
|              
|              
|Item 3.        |  | Qualitative and Quantitative Disclosures about Market Risk                            |    |             | 14                                                                                                                |     
|              
|              
|              
|              
|Item 4.        |  | Controls and Procedures                                                               |    |             | 15                                                                                                                |     
|              
|              
|              
|              
|PART II        |  | OTHER INFORMATION                                                                     |    |             |                                                                                                                   |     
|              
|              
|              
|              
|Item 1.        |  | Legal Proceedings                                                                     |    |             | 16                                                                                                                |     
|              
|              
|              
|              
|Item 6.        |  | Exhibits and Reports on Form 8-K                                                      |    |             | 16                                                                                                                |     
|              
|              
|              
|              
|SIGNATURES     |  |                                                                                       | 17 |            
|              
|              
|              
|              
|CERTIFICATIONS |  |                                                                                       | 18 |            
|              
|              
|              
|              
|EXHIBIT INDEX  |  |                                                                                       | 20 |            

2



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##### Table of Contents






PART I          FINANCIAL INFORMATION




Item 1. Financial Statements




AUGUST TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
(Unaudited)

|                              |                                                                                                                                 |                                            |                                      |        |        |               |       |              |        |  |  | 
|----------------------------- | ------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------------------------------------ | ------ | ------ | ------------- | ----- | ------------ | ------ |  |  | 
|                              |                                                                                                                                 |                                            |                                      |        |        | September 30, |       | December 31,
|                              |                                                                                                                                 |                                            |                                      |        |        | 2002          |       | 2001        
|                              |                                                                                                                                 |                                            |                                      |        |        |               |       |             
|                              |                                                                                                                                 |                                            |                                      | ASSETS |        |               |       |              |        |  |  | 
|                             
|                             
|                             
|                             
|Current assets:               |                                                                                                                                 |                                            |                                      |        |        |               |       |             
|                             
|                             
|                             
|                             
|                              | Cash and cash equivalents                                                                                                       |                                            | $                                    | 6,112  |        |               | $     | 1,523        |       
|                             
|                             
|                             
|                             
|                              | Short-term investments                                                                                                          |                                            |                                      | 15,538 |        |               |       | 23,196       |       
|                             
|                             
|                             
|                             
|                              | Accounts receivable, net                                                                                                        |                                            |                                      | 6,428  |        |               |       | 4,737        |       
|                             
|                             
|                             
|                             
|                              | Inventories                                                                                                                     |                                            |                                      | 8,430  |        |               |       | 9,384        |       
|                             
|                             
|                             
|                             
|                              | Prepaid expenses and other current assets                                                                                       |                                            |                                      | 1,088  |        |               |       | 2,838        |       
|                              |                                                                                                                                 |                                            |                                      |        |        |               |       |              |       
|                              |                                                                                                                                 | Total current assets                       |                                      |        | 37,596 |               |       |              | 41,678 | 
|                             
|                             
|                             
|                             
|Property and equipment, net   |                                                                                                                                 |                                            | 3,742                                |        |        |               | 3,541 |             
|                             
|                             
|                             
|                             
|Long-term investments         |                                                                                                                                 |                                            |                                     |        |        |               | 1,138 |             
|                             
|                             
|                             
|                             
|Other assets                  |                                                                                                                                 |                                            | 716                                  |        |        |               | 798   |             
|                              |                                                                                                                                 |                                            |                                      |        |        |               |       |              |       
|                              |                                                                                                                                 | Total assets                               |                                      | $      | 42,054 |               |       | $            | 47,155 | 
|                              |                                                                                                                                 |                                            |                                      |        |        |               |       |              |       
|                              |                                                                                                                                 |                                            | LIABILITIES AND SHAREHOLDERS EQUITY |        |        |               |       |              |        |  | 
|                             
|                             
|                             
|                             
|Current liabilities:          |                                                                                                                                 |                                            |                                      |        |        |               |       |             
|                             
|                             
|                             
|                             
|                              | Accounts payable                                                                                                                |                                            | $                                    | 1,950  |        |               | $     | 1,641        |       
|                             
|                             
|                             
|                             
|                              | Accrued compensation                                                                                                            |                                            |                                      | 923    |        |               |       | 615          |       
|                             
|                             
|                             
|                             
|                              | Accrued liabilities                                                                                                             |                                            |                                      | 470    |        |               |       | 536          |       
|                             
|                             
|                             
|                             
|                              | Customer deposits                                                                                                               |                                            |                                      | 1,684  |        |               |       | 1,715        |       
|                              |                                                                                                                                 |                                            |                                      |        |        |               |       |              |       
|                              |                                                                                                                                 | Total current liabilities                  |                                      |        | 5,027  |               |       |              | 4,507  | 
|                             
|                             
|                             
|                             
|Other non-current liabilities |                                                                                                                                 |                                            | 102                                  |        |        |               | 125   |             
|                              |                                                                                                                                 |                                            |                                      |        |        |               |       |              |       
|                              |                                                                                                                                 | Total liabilities                          |                                      |        | 5,129  |               |       |              | 4,632  | 
|                              |                                                                                                                                 |                                            |                                      |        |        |               |       |              |       
|Shareholders equity:         |                                                                                                                                 |                                            |                                      |        |        |               |       |             
|                             
|                             
|                             
|                             
|                              | Common stock, no par value, 42,000,000 shares
authorized, 13,129,969 and 12,812,164 shares issued
and outstanding, respectively |                                            |                                      | 42,066 |        |               |       | 41,020       |       
|                             
|                             
|                             
|                             
|                              | Undesignated capital stock, no par value, 3,000,000 shares
authorized, no shares issued or outstanding                          |                                            |                                      |       |        |               |       |             |       
|                             
|                             
|                             
|                             
|                              | Deferred compensation related to stock options                                                                                  |                                            |                                      | (118   | )      |               |       | (192         | )     
|                             
|                             
|                             
|                             
|                              | Retained earnings (accumulated deficit)                                                                                         |                                            |                                      | (5,079 | )      |               |       | 1,704        |       
|                             
|                             
|                             
|                             
|                              | Accumulated other comprehensive income (loss)                                                                                   |                                            |                                      | 56     |        |               |       | (9           | )     
|                              |                                                                                                                                 |                                            |                                      |        |        |               |       |              |       
|                              |                                                                                                                                 | Total shareholders equity                 |                                      |        | 36,925 |               |       |              | 42,523 | 
|                              |                                                                                                                                 |                                            |                                      |        |        |               |       |              |       
|                              |                                                                                                                                 | Total liabilities and shareholders equity |                                      | $      | 42,054 |               |       | $            | 47,155 | 
|                              |                                                                                                                                 |                                            |                                      |        |        |               |       |              |       

See accompanying notes to consolidated financial statements.

3



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##### Table of Contents






AUGUST TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)

|                                                               |         |                |        |                                  |        |                                 |        |       |        |      |        |       |        |   |        |      |        |  
|-------------------------------------------------------------- | ------- | -------------- | ------ | -------------------------------- | ------ | ------------------------------- | ------ | ----- | ------ | ---- | ------ | ----- | ------ | - | ------ | ---- | ------ | -
|                                                               |         |                |        | Three Months Ended September 30, |        | Nine Months Ended September 30,
|                                                               |         |                |        |                                  |        |                                
|                                                               |         |                |        | 2002                             |        | 2001                            |        | 2002  |        | 2001
|                                                               |         |                |        |                                  |        |                                 |        |       |        |     
|Net revenues                                                   |         | $              | 6,273  |                                  |        | $                               | 3,253  |       |        | $    | 18,763 |       |        | $ | 24,312 |     
|                                                              
|                                                              
|                                                              
|                                                              
|Cost of revenues                                               |         |                | 2,819  |                                  |        |                                 | 1,494  |       |        |      | 8,148  |       |        |   | 9,688  |     
|                                                               |         |                |        |                                  |        |                                 |        |       |        |      |        |       |        |   |        |     
|                                                               |         | Gross profit   |        |                                  | 3,454  |                                 |        |       | 1,759  |      |        |       | 10,615 |   |        |      | 14,624 |  
|                                                              
|Selling, general and administrative expenses                   |         |                | 3,104  |                                  |        |                                 | 2,691  |       |        |      | 8,762  |       |        |   | 8,939  |     
|                                                              
|                                                              
|                                                              
|                                                              
|Research and development expenses                              |         |                | 2,347  |                                  |        |                                 | 1,809  |       |        |      | 7,211  |       |        |   | 6,149  |     
|                                                              
|                                                              
|                                                              
|                                                              
|Non-recurring expenses                                         |         |                | 676    |                                  |        |                                 |       |       |        |      | 1,244  |       |        |   | 432    |     
|                                                               |         |                |        |                                  |        |                                 |        |       |        |      |        |       |        |   |        |     
|                                                               |         | Operating loss |        |                                  | (2,673 | )                               |        |       | (2,741 | )    |        |       | (6,602 | ) |        |      | (896   | )
|                                                              
|Interest income                                                |         |                | 124    |                                  |        |                                 | 330    |       |        |      | 506    |       |        |   | 1,177  |     
|                                                              
|                                                              
|                                                              
|                                                              
|Other expense                                                  |         |                |       |                                  |        |                                 |       |       |        |      |       |       |        |   | (17    | )   
|                                                               |         |                |        |                                  |        |                                 |        |       |        |      |        |       |        |   |        |     
|Income (loss) before provision for
(benefit from) income taxes |         |                | (2,549 | )                                |        |                                 | (2,411 | )     |        |      | (6,096 | )     |        |   | 264    |     
|                                                              
|                                                              
|                                                              
|                                                              
|Provision for (benefit from) income taxes                      |         |                |       |                                  |        |                                 | (1,033 | )     |        |      | 687    |       |        |   | (124   | )   
|                                                               |         |                |        |                                  |        |                                 |        |       |        |      |        |       |        |   |        |     
|Net income (loss)                                              |         | $              | (2,549 | )                                |        | $                               | (1,378 | )     |        | $    | (6,783 | )     |        | $ | 388    |     
|                                                               |         |                |        |                                  |        |                                 |        |       |        |      |        |       |        |   |        |     
|Net income (loss) per share:                                   |         |                |        |                                  |        |                                 |        |       |        |      |        |       |        |   |        |     
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               | Basic   |                | $      | (0.19                            | )      |                                 | $      | (0.11 | )      |      | $      | (0.52 | )      |   | $      | 0.03 |       
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               | Diluted |                | $      | (0.19                            | )      |                                 | $      | (0.11 | )      |      | $      | (0.52 | )      |   | $      | 0.03 |       

See accompanying notes to consolidated financial statements.

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AUGUST TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

|                                                      |                                                                                   |                                                                |                                                     |                                                     |       |                                 |        |         |     |        |     | 
|----------------------------------------------------- | --------------------------------------------------------------------------------- | -------------------------------------------------------------- | --------------------------------------------------- | --------------------------------------------------- | ----- | ------------------------------- | ------ | ------- | --- | ------ | --- | 
|                                                      |                                                                                   |                                                                |                                                     |                                                     |       | Nine Months Ended September 30,
|                                                      |                                                                                   |                                                                |                                                     |                                                     |       |                                
|                                                      |                                                                                   |                                                                |                                                     |                                                     |       | 2002                            |        | 2001   
|                                                      |                                                                                   |                                                                |                                                     |                                                     |       |                                 |        |        
|Cash flows from operating activities:                 |                                                                                   |                                                                |                                                     |                                                     |       |                                 |        |        
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Net income (loss)                                                                 |                                                                | $                                                   | (6,783                                              | )     |                                 | $      | 388     |    
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Adjustments to reconcile net income (loss) to net cash from
operating activities: |                                                                |                                                     |                                                     |       |                                 |        |         |    
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                   | Depreciation and amortization                                  |                                                     |                                                     | 1,042 |                                 |        |         | 637 |       
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                   | Deferred income taxes                                          |                                                     |                                                     | 896   |                                 |        |         |    |       
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                   | Provision for doubtful accounts                                |                                                     |                                                     | 71    |                                 |        |         | 136 |       
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                   | Amortization of deferred compensation related to stock options |                                                     |                                                     | 50    |                                 |        |         | 70  |       
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                   | Loss on disposition of assets                                  |                                                     |                                                     |      |                                 |        |         | 17  |       
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                   | Changes in operating assets and liabilities:                   |                                                     |                                                     |       |                                 |        |         |     |       
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                   |                                                                | Accounts receivable                                 |                                                     |       | (1,762                          | )      |         |     | 3,545  |    
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                   |                                                                | Inventories                                         |                                                     |       | 954                             |        |         |     | (725   | )  
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                   |                                                                | Prepaid expenses and other current assets           |                                                     |       | 1,428                           |        |         |     | (1,440 | )  
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                   |                                                                | Accounts payable                                    |                                                     |       | 309                             |        |         |     | (972   | )  
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                   |                                                                | Accrued compensation                                |                                                     |       | 308                             |        |         |     | (220   | )  
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                   |                                                                | Accrued liabilities                                 |                                                     |       | (88                             | )      |         |     | (381   | )  
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                   |                                                                | Customer deposits                                   |                                                     |       | (31                             | )      |         |     | (281   | )  
|                                                      |                                                                                   |                                                                |                                                     |                                                     |       |                                 |        |         |    
|                                                      |                                                                                   |                                                                |                                                     | Net cash provided by (used in) operating activities |       |                                 | (3,606 | )       |     |        | 774 | 
|                                                      |                                                                                   |                                                                |                                                     |                                                     |       |                                 |        |         |    
|Cash flows from investing activities:                 |                                                                                   |                                                                |                                                     |                                                     |       |                                 |        |        
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Maturities of marketable securities                                               |                                                                |                                                     | 31,538                                              |       |                                 |        | 42,966  |    
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Purchases of marketable securities                                                |                                                                |                                                     | (22,676                                             | )     |                                 |        | (43,966 | )  
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Purchases of property and equipment                                               |                                                                |                                                     | (1,177                                              | )     |                                 |        | (2,006  | )  
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Investment in other assets                                                        |                                                                |                                                     | (559                                                | )     |                                 |        | (236    | )  
|                                                      |                                                                                   |                                                                |                                                     |                                                     |       |                                 |        |         |    
|                                                      |                                                                                   |                                                                | Net cash provided by (used in) investing activities |                                                     |       | 7,126                           |        |         |     | (3,242 | )  
|                                                      |                                                                                   |                                                                |                                                     |                                                     |       |                                 |        |         |    
|Cash flows from financing activities:                 |                                                                                   |                                                                |                                                     |                                                     |       |                                 |        |        
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Net proceeds from issuances of common stock                                       |                                                                |                                                     | 1,070                                               |       |                                 |        | 451     |    
|                                                      |                                                                                   |                                                                |                                                     |                                                     |       |                                 |        |         |    
|                                                      |                                                                                   |                                                                | Net cash provided by financing activities           |                                                     |       | 1,070                           |        |         |     | 451    |    
|                                                      |                                                                                   |                                                                |                                                     |                                                     |       |                                 |        |         |    
|Effect of exchange rates on cash and cash equivalents |                                                                                   |                                                                | (1                                                  | )                                                   |       |                                 | (3     | )      
|                                                      |                                                                                   |                                                                |                                                     |                                                     |       |                                 |        |         |    
|Net increase (decrease) in cash and cash equivalents  |                                                                                   |                                                                | 4,589                                               |                                                     |       |                                 | (2,020 | )      
|                                                     
|                                                     
|                                                     
|                                                     
|Cash and cash equivalents at beginning of period      |                                                                                   |                                                                | 1,523                                               |                                                     |       |                                 | 3,103  |        
|                                                      |                                                                                   |                                                                |                                                     |                                                     |       |                                 |        |         |    
|Cash and cash equivalents at end of period            |                                                                                   | $                                                              | 6,112                                               |                                                     |       | $                               | 1,083  |        
|                                                      |                                                                                   |                                                                |                                                     |                                                     |       |                                 |        |         |    
|Supplemental cash flow information:                   |                                                                                   |                                                                |                                                     |                                                     |       |                                 |        |        
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Cash refunds of (paid for) income taxes                                           |                                                                | $                                                   | 1,749                                               |       |                                 | $      | (2,005  | )  

See accompanying notes to consolidated financial statements.

5



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AUGUST TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(In thousands, except per share amounts)
(Unaudited)

Note 1  Basis of Presentation

The accompanying unaudited consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures, normally included
in consolidated financial statements prepared in accordance with accounting
principles generally accepted in the United States of America, have been
condensed or omitted pursuant to such rules and regulations. In the opinion
of the management of August Technology Corporation (the Company), all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation have been included in the balance sheet at September
30, 2002, the operating results for the three and nine months ended September
30, 2002 and 2001 and cash flows for the nine months ended September 30, 2002
and 2001. The results of operations of the interim periods are not
necessarily indicative of the results of operations that may be expected for
any other period or for the year as a whole. These consolidated financial
statements and notes hereto should be read in conjunction with the audited
consolidated financial statements and notes thereto included in the Companys
Annual Report on Form 10-K for the year ended December 31, 2001, filed with
the Securities and Exchange Commission on March 15, 2002.

The accompanying consolidated financial statements include the accounts
of August Technology Corporation and its subsidiaries (together, the
Company). All intercompany balances and transactions are eliminated in
consolidation.

Certain prior year amounts have been reclassified to conform to the 2002
presentation.

Note 2  Terminated Acquisition

On May 23, 2002, the Company entered into a definitive agreement (the
Agreement) with ASTI Holdings, Ltd. (ASTI) of Singapore to acquire
Semiconductor Technologies & Instruments, Inc. (STI) for a purchase price of
$26.1 million, consisting of $12 million cash, a $3 million six month note to
ASTI and $11.1 million in stock. Due to discoveries made during due diligence,
the Company requested changes in the terms of the Agreement including a
reduction in the purchase price. The Company and ASTI were unable to reach
resolution on this matter and as a result the Company notified ASTI on August
21, 2002 of the termination of the Agreement on the basis that the conditions
to the Companys obligations set forth in the Agreement could no longer be
satisfied. As a result, the Company wrote-off all costs related to the
acquisition during the third quarter of 2002.

The Company believes it is entitled to terminate the Agreement and that
ASTI owes the Company a $2.6 million break up fee (the Break up Fee), as
outlined in the Agreement. ASTI disputes the Companys right to terminate the
Agreement and the Company and ASTI are currently in negotiations to settle the
dispute. If such negotiations fail, it is possible that one or both parties
will seek the Break up Fee or damages under the Agreement in an arbitration
proceeding or through litigation. In the event the Company fails to prevail in
any such dispute, resulting damage awards or

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the payment of the Break up Fee may have a material adverse effect on the
Companys financial condition. Whether or not the Company prevails, the legal
expenses involved in any such proceeding may be material.

Note 3  Accounts Receivable

Accounts receivable consisted of the following:

|                                |                          |   |               |       |              |   |       |       | 
|------------------------------- | ------------------------ | - | ------------- | ----- | ------------ | - | ----- | ----- | 
|                                |                          |   | September 30, |       | December 31,
|                                |                          |   | 2002          |       | 2001        
|                                |                          |   |               |       |             
|Billed receivables              |                          | $ | 6,350         |       |              | $ | 4,640 |      
|                               
|                               
|                               
|                               
|Unbilled receivables            |                          |   | 551           |       |              |   | 499   |      
|                                |                          |   |               |       |              |   |       |      
|                                |                          |   | 6,901         |       |              |   | 5,139 |      
|                               
|                               
|                               
|                               
|Allowance for doubtful accounts |                          |   | (473          | )     |              |   | (402  | )    
|                                |                          |   |               |       |              |   |       |      
|                                | Accounts receivable, net |   | $             | 6,428 |              |   | $     | 4,737 | 
|                                |                          |   |               |       |              |   |       |      

Note 4  Inventories

Inventories consisted of the following:

|                                               |             |   |               |       |              |   |       |       | 
|---------------------------------------------- | ----------- | - | ------------- | ----- | ------------ | - | ----- | ----- | 
|                                               |             |   | September 30, |       | December 31,
|                                               |             |   | 2002          |       | 2001        
|                                               |             |   |               |       |             
|Raw materials                                  |             | $ | 3,176         |       |              | $ | 3,118 |      
|                                              
|                                              
|                                              
|                                              
|Work in process                                |             |   | 1,476         |       |              |   | 779   |      
|                                              
|                                              
|                                              
|                                              
|Finished goods                                 |             |   | 3,082         |       |              |   | 4,455 |      
|                                              
|                                              
|                                              
|                                              
|Inventories at customers under purchase orders |             |   | 696           |       |              |   | 1,032 |      
|                                               |             |   |               |       |              |   |       |      
|                                               | Inventories |   | $             | 8,430 |              |   | $     | 9,384 | 
|                                               |             |   |               |       |              |   |       |      

Inventories at customers under purchase orders represent systems that
have shipped under the terms of a customer purchase order, but have not yet
qualified for revenue recognition as the systems had not met customer
specifications as of September 30, 2002 or December 31, 2001.

Note 5  Investments

The Company changed the classification of all of its investments from
held-to-maturity to available-for-sale during the second quarter of 2002.
Available-for-sale securities are recorded at fair value, with the unrealized
gains and losses reported in Shareholders Equity under the caption
Accumulated other comprehensive income (loss). Realized gains and losses,
interest and dividends on available-for-sale securities are included in
interest income. Net unrealized gains on investments were $26 and $66 for
the three and nine months ended September 30, 2002, respectively.

Note 6  Other Assets

On May 6, 2002, the Company invested $500 in Excelerate Technologies,
Inc. in the form of a note receivable. The note receivable bears interest at
8%, matures on May 5, 2003 and upon maturity is convertible into preferred
stock of Excelerate Technologies.

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Note 7  Shareholders Equity

Changes in shareholders equity during the nine months ended September
30, 2002 were as follows:

|                                                   |                                                                |                                     |        |    |        |  
|-------------------------------------------------- | -------------------------------------------------------------- | ----------------------------------- | ------ | -- | ------ | -
|Shareholders equity balance at December 31, 2001  |                                                                | $                                   | 42,523 |   
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Issuances of common stock in conjunction with:                 |                                     |        |    |       
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                | Exercises of employee stock options |        |    | 940    |  
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                | Employee stock purchase plan        |        |    | 130    |  
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Amortization of deferred compensation related to stock options |                                     |        | 50 |       
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Comprehensive loss:                                            |                                     |        |    |       
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                | Net loss                            |        |    | (6,783 | )
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                | Other comprehensive income          |        |    | 65     |  
|                                                   |                                                                |                                     |        |   
|Shareholders equity balance at September 30, 2002 |                                                                | $                                   | 36,925 |   
|                                                   |                                                                |                                     |        |   

Note 8  Income Taxes

The Company has deferred tax assets of $4.0 million as of September 30,
2002, which have arisen primarily as a result of operating losses, as well as
other temporary differences between book and tax accounting. Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes,
requires the establishment of a valuation allowance to reflect the likelihood
of the realization of deferred tax assets. As a result of operating losses
during the previous fifteen months, anticipated operating losses for the
remainder of 2002 and uncertainty as to the extent and timing of
profitability in future periods, the Company continues to record a full
valuation allowance against its deferred tax assets as of September 30, 2002.
Accordingly, a $3.1 million tax benefit has been offset by a $3.1 million
valuation allowance, which due to the recording of an income tax benefit in
the first quarter of 2002, has resulted in income tax expense of $687 for the
nine months ended September 30, 2002. The remaining $869 of the deferred tax
assets relate to the tax benefit of stock options, which has also been offset
by an $869 valuation allowance. Any future benefit resulting from the
reversal of the valuation allowance related to the exercise of stock options
will result in an increase in common stock.

Note 9  Net Income (Loss) Per Share

The components of basic and diluted net income (loss) per share are as
follows:

|                                |  |                                               |        |                                  |        |                                 |        |      |        |      |        |   |        |   |     |   |        | 
|------------------------------- |  | --------------------------------------------- | ------ | -------------------------------- | ------ | ------------------------------- | ------ | ---- | ------ | ---- | ------ | - | ------ | - | --- | - | ------ | 
|                                |  |                                               |        | Three Months Ended September 30, |        | Nine Months Ended September 30,
|                                |  |                                               |        |                                  |        |                                
|                                |  |                                               |        | 2002                             |        | 2001                            |        | 2002 |        | 2001
|                                |  |                                               |        |                                  |        |                                 |        |      |        |     
|Net income (loss)               |  | $                                             | (2,549 | )                                |        | $                               | (1,378 | )    |        | $    | (6,783 | ) |        | $ | 388 |  
|                               
|Weighted average common shares: |  |                                               |        |                                  |        |                                 |        |      |        |      |        |   |        |   |     |  
|                               
|                               
|                               
|                               
|                                |  | Basic                                         |        |                                  | 13,123 |                                 |        |      | 12,768 |      |        |   | 13,000 |   |     |   | 12,698 | 
|                               
|                               
|                               
|                               
|                                |  | Effect of dilutive stock options and warrants |        |                                  |       |                                 |        |      |       |      |        |   |       |   |     |   | 616    | 
|                                |  |                                               |        |                                  |        |                                 |        |      |        |      |        |   |        |   |     |  
|                                |  | Diluted                                       |        |                                  | 13,123 |                                 |        |      | 12,768 |      |        |   | 13,000 |   |     |   | 13,314 | 
|                                |  |                                               |        |                                  |        |                                 |        |      |        |      |        |   |        |   |     |  
|Net income (loss) per share:    |  |                                               |        |                                  |        |                                 |        |      |        |      |        |   |        |   |     |  
|                               
|                               
|                               
|                               
|                                |  | Basic                                         |        | $                                | (0.19  | )                               |        | $    | (0.11  | )    |        | $ | (0.52  | ) |     | $ | 0.03   | 
|                               
|                               
|                               
|                               
|                                |  | Diluted                                       |        | $                                | (0.19  | )                               |        | $    | (0.11  | )    |        | $ | (0.52  | ) |     | $ | 0.03   | 

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The total weighted average number of stock options and warrants excluded
from the calculation of potentially dilutive securities either due to the
exercise price exceeding the average market price or the inclusion of such
securities in a calculation of net loss per share would have been
anti-dilutive for the three months ended September 30, 2002 and 2001 were
1,465 and 1,587, respectively, and for the nine months ended September 30,
2002 and 2001 were 1,557 and 352, respectively.

Note 10  Comprehensive Income (Loss)

Comprehensive income (loss) is defined as net income (loss) and other
changes in shareholders equity from transactions and other events from
sources other than shareholders. The components of and changes in other
comprehensive income (loss) are as follows:

|                                   |                                         |   |                                  |    |                                 |   |        |   |      |   |        |    |   |   |     |    |  
|---------------------------------- | --------------------------------------- | - | -------------------------------- | -- | ------------------------------- | - | ------ | - | ---- | - | ------ | -- | - | - | --- | -- | -
|                                   |                                         |   | Three Months Ended September 30, |    | Nine Months Ended September 30,
|                                   |                                         |   |                                  |    |                                
|                                   |                                         |   | 2002                             |    | 2001                            |   | 2002   |   | 2001
|                                   |                                         |   |                                  |    |                                 |   |        |   |     
|Net income (loss)                  |                                         | $ | (2,549                           | )  |                                 | $ | (1,378 | ) |      | $ | (6,783 | )  |   | $ | 388 |   
|                                  
|                                  
|                                  
|                                  
|Other comprehensive income (loss): |                                         |   |                                  |    |                                 |   |        |   |      |   |        |    |   |   |     |   
|                                  
|                                  
|                                  
|                                  
|                                   | Foreign currency translation adjustment |   |                                  | (4 | )                               |   |        | 5 |      |   |        | (1 | ) |   |     | (3 | )
|                                  
|                                  
|                                  
|                                  
|                                   | Net unrealized gains on investments     |   |                                  | 26 |                                 |   |        |  |      |   |        | 66 |   |   |     |   |  
|                                   |                                         |   |                                  |    |                                 |   |        |   |      |   |        |    |   |   |     |   
|Comprehensive income (loss)        |                                         | $ | (2,527                           | )  |                                 | $ | (1,373 | ) |      | $ | (6,718 | )  |   | $ | 385 |   
|                                   |                                         |   |                                  |    |                                 |   |        |   |      |   |        |    |   |   |     |   

Note 11  Line of Credit

The Company entered into a revolving credit line agreement (the Credit
Facility) with a bank on July 26, 2002 that expires in April 2004. The
Credit Facility allows for borrowings of up to $5.0 million subject to
availability based on accounts receivable and inventory balances. Interest
is payable monthly at the 30-day LIBOR rate plus 2.25%. The Credit Facility
contains financial covenants which include levels of tangible net worth,
capital expenditures and default provisions, including provisions related to
non-payment of principal and interest, bankruptcy and default under other
debt agreements. There is no balance outstanding under the Credit Facility
as of September 30, 2002.

Note 12  New Accounting Pronouncements

In July 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS 146 addresses financial
accounting and reporting for costs associated with exit or disposal
activities and nullifies EITF Issue No. 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring) and must be applied
beginning January 1, 2003. SFAS 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability
is incurred rather than when the exit or disposal plan is approved. The
Company does not expect that the adoption of SFAS 146 will have an effect on
its consolidated financial statements. The Company will adopt the provisions
of SFAS 146 for exit and disposal activities that are initiated after
December 31, 2002 as required by the standard.

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

Cautionary Factors That May Affect Future Results

Certain statements made in this Quarterly Report on Form 10-Q, as well as
oral statements made by us from time to time, which are prefaced with words
such as expects, anticipates, believes, projects, intends, plans
and similar words and other statements of similar sense, are forward-looking
statements. Our forward-looking statements generally relate to our growth
strategies, financial results, future financial projections, product
development activities and sales efforts. These forward-looking statements,
like any other forward-looking statements, involve risks and uncertainties
known and unknown, and may be affected by inaccurate assumptions, including,
among others, those discussed in the Cautionary Statements section of our
Annual Report on Form 10-K for the year ended December 31, 2001, as filed with
the Securities and Exchange Commission on March 15, 2002. The risks and
uncertainties could cause actual results to differ materially from those
projected or anticipated. We disclaim any obligation to subsequently revise
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.

Overview

August Technology serves microelectronics device manufacturing industries
with tools that enable manufacturers to bring new products to market faster and
with less cost. As a worldwide leader in the research, design, development,
manufacture, marketing, sales, distribution and service of automated micro
defect inspection and metrology systems, we make it possible for
microelectronic device manufacturers to more effectively meet the needs of the
high technology communication, transportation, entertainment, productivity,
biomedical and security markets. The flexibility of our tools has allowed us to
successfully serve the semiconductor manufacturing market while concurrently
providing effective solutions for high growth markets such as data storage,
medical devices, micro displays, optoelectronics, photonics and MEMS.
Microelectronic devices processed through our systems can be found in consumer
products such as personal computers and computer peripherals, cell phones,
personal digital assistants (PDAs), set-top boxes, electronic games, security
systems, automobiles, medical devices and throughout the communications
infrastructure in electrical, optical and wireless networks.

The following discussion of our financial condition and results of
operations should be read in conjunction with our audited consolidated
financial statements and notes thereto included in our Annual Report on Form
10-K for the year ended December 31, 2001, filed with the Securities and
Exchange Commission on March 15, 2002.

We continue to be in the midst of a significant downturn in both the
semiconductor and microelectronic markets. The downturn began early in 2001
and has been driven by deteriorating macro-economic conditions that have caused
a reduction in demand for semiconductor and microelectronic devices. This
reduction in demand has resulted in device manufacturers having excess capacity
and caused them to reduce their capital spending. In response to the ongoing
downturn, we are continuing our cost management program that began in March
2001. The program has included, at various times, raw material cost
reductions, reductions in temporary and contract staff, work force reductions,
mandatory vacation time and decreases in discretionary spending, certain
compensation expenditures and overtime (the Cost Cutting Programs). The

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current downturn, future business cycles, the timing of new product
announcements and releases by us or our competitors, market acceptance of new
or enhanced versions of our products, changes in the pricing of our products
and the timing and level of our research and development expenditures will
impact future quarterly results.

Results of Operations

Net Revenues.Net revenues were $6.3 million and $18.8 million for the
three and nine month periods ended September 30, 2002, compared to $3.3 million
and $24.3 million for the same periods in 2001, representing an increase of
92.8%, and a decrease of 22.8%, for the respective periods. The increase in
net revenues for the three months ended September 30, 2002 versus 2001 is due
to revenues from our 3Di Series, which began shipping during the third quarter
of 2001, partially offset by lower NSX revenues. The decline in revenues for
the nine months ended September 30, 2002 versus 2001 is a result of lower NSX
revenues, partially offset by revenues from our 3Di Series. The decrease in
NSX revenues during the three and nine months ended September 30, 2002 is due
to the continued downturn noted earlier.

Gross Margin.Gross margins were 55.1% and 56.6% of net revenues for the
three and nine month periods ended September 30, 2002, compared to 54.1% and
60.2% of net revenues for the same periods in 2001. The increase in gross
margins for the three months ended September 30, 2002 versus 2001 was primarily
due to an increase in the number of systems manufactured, which resulted in
higher manufacturing utilization and decreased labor and overhead costs per
system sold, partially offset by sales of models within the 3Di Series that
have lower margins than the NSX Series. The decrease in gross margins for the
nine months ended September 30, 2002 versus 2001 was primarily due to a
decrease in the number of systems manufactured, which resulted in lower
manufacturing utilization and increased labor and overhead costs per system
sold, and to lower 3Di margins noted above.

Selling, General and Administrative Expenses.Selling, general and
administrative expenses consist primarily of employee salaries and related
benefits, travel expenses and occupancy related costs. Selling, general and
administrative expenses were $3.1 million and $8.8 million for the three and
nine month periods ended September 30, 2002, compared to $2.7 million and $8.9
million for the same periods in 2001, representing an increase of 15.3% and a
decrease of 2.0% for the respective periods. As a percentage of net revenues,
expenses were 49.5% and 46.7% for the three and nine month periods ended
September 30, 2002, compared to 82.7% and 36.8% for the same periods in 2001.
The increase in expenses for the three months ended September 30, 2002 versus
2001 was primarily due to increases in: (i) the costs associated with systems
being evaluated by customers; (ii) employee compensation; and (iii)
depreciation expense, partially offset by the continued use of various
components of our Cost Cutting Programs. The decrease in expense dollars for
the nine months ended September 30, 2002 versus 2001 was primarily due to the
Cost Cutting Programs and a decline in commissions expense due to the decreased
revenues, partially offset by an increase in depreciation expense related to
assets capitalized subsequent to the beginning of the third quarter of 2001.

Research and Development Expenses.Research and development expenses
consist primarily of employee salaries and related benefits, and consulting
fees for individuals engaged in the research, design and development of new
products. Research and development expenses were $2.3 million and $7.2 million
for the three and nine month periods ended September 30, 2002, compared to $1.8
million and $6.1 million for the same periods in 2001, representing an increase
of

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29.7% and 17.3% for the respective periods. As a percentage of net revenues,
the expenses were 37.4% and 38.4% for the three and nine month periods ended
September 30, 2002, compared to 55.6% and 25.3% for the same periods in 2001.
The increase in expenses for both the three and nine month periods was
primarily due to our focus on advancing the development of new and existing
products in each of our product lines, which led to the hiring of additional
engineers and the use of additional outside contractors. These increases were
partially offset by the continued use of various components of our Cost Cutting
Programs and a reduction in employee recruiting and relocation costs due to
hirings in the current year were made with fewer relocations and minimal use of
recruiting agencies.

Non-recurring Expenses.Non-recurring expenses for the three month period
ended September 30, 2002 were $676,000 which included $459,000 for the
write-off of acquisition related costs, $173,000 of employee severance costs
and $44,000 of expenses related to the modification of our distributor
agreement with Metron Technology, LTD (Metron), as a result of our decision
to sell directly to customers in Asia, except Japan and South Korea.
Non-recurring expenses for the nine month period ended September 30, 2002 were
$1.2 million which included $459,000 for the write-off of acquisition related
costs, $428,000 of expenses related to the modification of our distributor
agreement with Metron and $357,000 of employee severance costs. Non-recurring
expenses for the nine months ended September 30, 2001 were $432,000 which
included $348,000 of expenses related to the modification of our distributor
agreement with Metron, as a result of our decision to sell directly to
customers in Taiwan and $84,000 of employee severance costs related to a
reduction in work force.

Interest Income.Interest income was $124,000 and $506,000 for the three
and nine month periods ended September 30, 2002, compared to $330,000 and $1.2
million for the same periods in 2001. The decrease in interest income was due
to lower overall investment balances in 2002, due to the use of cash to fund
operations and acquire property and equipment, and lower rates of return earned
on investment balances.

Income Taxes.The provisions for income taxes were none and $687,000 for
the three and nine month periods ended September 30, 2002, compared to a tax
benefit of $1.0 million and $124,000 for the same periods in 2001. There was
no provision for income taxes recorded during the three months ended September
30, 2002 due to the recording of a full valuation allowance against deferred
tax assets. Statement of Financial Accounting Standards No. 109 Accounting
for Income Taxes, requires the establishment of a valuation allowance to
reflect the likelihood of the realization of deferred tax assets. As a result
of operating losses during the previous fifteen months, anticipated operating
losses for the remainder of 2002 and uncertainty as to the extent and timing of
profitability in future periods, we continue to record a full valuation
allowance of $3.1 million against deferred tax assets as of September 30, 2002.
The provision for the nine months ended September 30, 2002 is partially offset
by a tax benefit recorded in the first quarter of 2002.

We recorded a tax benefit during the nine months ended September 30, 2001,
rather than tax expense associated with the pre-tax income, due to the relative
size of certain tax credits that were to be earned during 2001 in proportion to
the expected level of income before taxes in 2001.

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Liquidity and Capital Resources

Cash and Cash Equivalents and Working Capital

During the nine months ended September 30, 2002, working capital decreased
to $32.6 million as compared to $37.2 million at December 31, 2001. Working
capital decreased primarily due to the use of cash and cash equivalents and
short-term investments to fund operations, acquire property and equipment and
invest in other assets. The decrease was partially offset by proceeds received
from issuances of common stock and the reinvestment of maturities of long-term
investments in cash equivalents.

At September 30, 2002 our principal sources of liquidity consisted of
$21.7 million of cash and cash equivalents and investments and our revolving
credit line agreement, which expires in April 2004. This agreement allows for
borrowings of up to $5.0 million subject to availability based on accounts
receivable and inventory balances. Our liquidity is affected by many factors,
some of which are based on the normal ongoing operations of our business and
others of which relate to the uncertainties of global economies and the
cyclical nature of the semiconductor and microelectronic industries. We have
no outstanding debt at September 30, 2002. Although liquidity requirements
will fluctuate based on the timing and extent of these factors, management
believes that existing cash and investment balances and our line of credit will
be adequate to satisfy our liquidity requirements for the next twelve months.

Cash Flows

Net cash used in operating activities for the nine months ended September
30, 2002 was $3.6 million, which resulted primarily from our net loss and
increase in accounts receivable, partially offset by non-cash charges and
decreased prepaid expenses and other current assets and inventories. Net cash
provided by investing activities was $7.1 million, primarily due to $8.9
million of net proceeds from maturities of investments partially offset by $1.2
million of purchases of property and equipment. Net cash provided by financing
activities was $1.1 million from the proceeds received from issuances of common
stock.

Net cash provided by operating activities for the nine months ended
September 30, 2001 was $774,000, which resulted primarily from decreased
accounts receivable, partially offset by increased prepaid expenses and other
current assets and inventories, and decreased accounts payable. Net cash used
in investing activities was $3.2 million, due to $1.0 million of net purchases
of investments and purchases of $2.2 million of property and equipment. Net
cash provided by financing activities was $451,000 from the proceeds received
from issuances of common stock.

Terminated Acquisition

On May 23, 2002, we entered into a definitive agreement (the Agreement)
with ASTI Holdings, Ltd. (ASTI) of Singapore to acquire Semiconductor
Technologies & Instruments, Inc. (STI) for a purchase price of $26.1 million,
consisting of $12 million cash, a $3 million six month note to ASTI and $11.1
million in stock. Due to discoveries made during due diligence, we have
requested changes in the terms of the Agreement including a reduction in the
purchase price. We were unable to reach resolution on this matter with ASTI
and as a result we notified ASTI on August 21, 2002 of the termination of the
Agreement on the basis that the conditions to our

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obligations set forth in the Agreement could no longer be satisfied. As a
result, we wrote-off all costs related to the acquisition during the third
quarter of 2002.

We believe we are entitled to terminate the Agreement and that ASTI owes
us a $2.6 million break up fee (the Break up Fee), as outlined in the
Agreement. ASTI disputes our right to terminate the Agreement and we are
currently in negotiations with ASTI to settle the dispute. If such
negotiations fail, it is possible that one or both parties will seek the Break
up Fee or damages under the Agreement in an arbitration proceeding or through
litigation. In the event we fail to prevail in any such dispute, resulting
damage awards or the payment of the Break up Fee may have a material adverse
effect on our financial condition. Whether or not we prevail, the legal
expenses involved in any such proceeding may be material.

New Accounting Pronouncements

In July 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS 146 addresses financial
accounting and reporting for costs associated with exit or disposal
activities and nullifies EITF Issue No. 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring) and must be applied
beginning January 1, 2003. SFAS 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability
is incurred rather than when the exit or disposal plan is approved. We do
not expect that the adoption of SFAS 146 will have an effect on our
consolidated financial statements. We will adopt the provisions of SFAS 146
for exit and disposal activities that are initiated after December 31, 2002
as required by the standard.




Item 3. Qualitative and Quantitative Disclosures about Market Risk

Market Risk

We are exposed to market risk primarily from changes in interest rates and
credit risk. We do not have material exposure to market risk from fluctuations
in foreign currency exchange rates because all sales are made in U.S. dollars.

Interest Rate Risk

We are exposed to interest rate risk primarily from investments in cash
equivalents and short-term and long-term marketable debt securities (the
Investment Portfolio). The entire Investment Portfolio classification was
changed from held-to-maturity to available-for-sale during the second quarter
of 2002 and, accordingly, is recorded on the balance sheet at fair market
value, with unrealized gains or losses excluded from earnings and included in
Accumulated other comprehensive income (loss) until realized. The entire
Investment Portfolio is denominated in U.S. dollars. We do not use derivative
financial instruments in the Investment Portfolio. Due to the short duration
of our investment portfolio, an immediate 10 percent change in interest rates
is not expected to have a material adverse effect on our near-term financial
condition or results of operations.

Credit Risk

Financial instruments which potentially subject us to credit risk consist
principally of securities in the Investment Portfolio and trade receivables.
We limit credit risk related to the Investment

14



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Portfolio by placing all investments with high quality credit issuers and limit
the amount of investments with any one issuer. As of September 30, 2002, 100%
of the Investment Portfolio consisted of government securities and corporate
commercial paper and bonds with maturities of one year or less. We limit
credit risk associated with trade receivables by performing ongoing credit
evaluations and believe that there is no additional risk beyond amounts
provided for collection losses to be inherent in trade receivables.




Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Within the ninety day period prior to the date of this report, the Company
conducted an evaluation under the supervision and with the participation of the
Companys management, including the Companys Chief Executive Officer and
Acting Chief Financial Officer and Vice President, Finance, regarding the
effectiveness of the design and operation of the Companys disclosure controls
and procedures pursuant to Rule 13a-14 of the Securities Exchange Act of 1934.
Based upon that evaluation, the Chief Executive Officer and Acting Chief
Financial Officer and Vice President, Finance concluded that the Companys
disclosure controls and procedures are effective to ensure that material
information relating to the Company, including its consolidated subsidiaries,
is made known to them.

Changes in Internal Controls

There were no significant changes in the Companys internal controls or in
other factors that could significantly affect internal controls subsequent to
the date the Company carried out its evaluation.

15



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##### Table of Contents






PART II  OTHER INFORMATION




Item 1. Legal Proceedings

At this time, ASTI and the Company are in negotiations to settle the
dispute as summarized in Note 2 of the Notes to Consolidated Financial
Statements. If such negotiations fail, it is possible that one or both parties
will seek the Break up Fee of $2.6 million or damages under the Agreement in an
arbitration proceeding or through litigation. In the event the Company fails
to prevail in any such dispute, resulting damage awards or the payment of the
Break up Fee may have a material adverse effect on the Companys financial
condition. Whether or not the Company prevails, the legal expenses involved in
any such proceeding may be material.




Item 6. Exhibits and Reports on Form 8-K



| | (a) |  | Exhibits:
| | --- |  | ---------



| |  |  | The exhibits listed on the Exhibit Index are
filed herewith.
| |  |  | ------------------------------------------------------------



| | (b) |  | Reports on Form 8-K:
| | --- |  | --------------------



| |  |  | Current report on Form 8-K dated and filed August
14, 2002, was filed pursuant to Item 5 (Other
Events) to report the submission of CEO and CFO
certifications for Section 906 of the
Sarbanes-Oxley Act of 2002 for the quarterly
period ended June 30, 2002.
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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##### Table of Contents






SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

|                        |  |                                                                                                                                   
|----------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------
|                        |  | AUGUST TECHNOLOGY CORPORATION                                                                                                     
|                       
|                       
|                       
|                       
|                        |  |                                                                                                                                   
|                        |  |                                                                                                                                   
|                       
|                       
|                       
|                       
|Date: November 13, 2002 |  | By: /s/ JEFF L. ODELL
Jeff L. ODell
Chief Executive Officer
(Principal Executive Officer)                                       
|                       
|                       
|                       
|                       
|                        |  |                                                                                                                                   
|                       
|                       
|                       
|                       
|Date: November 13, 2002 |  | By: /s/ SCOTT A. GABBARD
Scott A. Gabbard
Acting Chief Financial Officer and
Vice President, Finance
(Principal Financial Officer)

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##### Table of Contents






CERTIFICATIONS

I, Jeff L. ODell, certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of August Technology
Corporation;                                                                                                                                                                                                                                          
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;                   
|  
|4. |  | The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:                                                                                                     



| |  | a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | b) evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the Evaluation Date); and                                                                                                  
|
| |  | c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal
controls; and                                                                                                                                        



|6. |  | The registrants other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                        |  |                                                              
|----------------------- |  | -------------------------------------------------------------
|Date: November 13, 2002 |  | By: /s/ JEFF L. ODELL
Jeff L. ODell
Chief Executive Officer

18



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##### Table of Contents



I, Scott A. Gabbard, certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of August Technology
Corporation;                                                                                                                                                                                                                                          
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;                   
|  
|4. |  | The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:                                                                                                     



| |  | a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | b) evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the Evaluation Date); and                                                                                                  
|
| |  | c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data and
have identified for the registrants auditors any material weaknesses
in internal controls; and
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal
controls; and                                                                                                                                        



|6. |  | The registrants other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                        |  |                                                                                                     
|----------------------- |  | ----------------------------------------------------------------------------------------------------
|Date: November 13, 2002 |  | By: /s/ SCOTT A. GABBARD
Scott A. Gabbard
Acting Chief Financial Officer and
Vice President, Finance

19



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##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


EXHIBIT INDEX TO FORM 10-Q

|                   |  |                               
|------------------ |  | ------------------------------
|For Quarter Ended: |  | Commission File No.: 000-30637
|                  
|                  
|                  
|                  
|September 30, 2002 |  |                               

---

AUGUST TECHNOLOGY CORPORATION

---

|        |  |                                                                                                                       
|------- |  | ----------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                       
|Number  |  | Description                                                                                                           
|        |  |                                                                                                                       
|10.1*   |  | Executive Employment Agreement between the Company and Scott A. Gabbard,
dated July 11, 2002                          
|       
|       
|       
|       
|10.2    |  | Definitive agreement with ASTI Holdings Limited and Semiconductor
Technologies & Instruments, Inc., dated May 23, 2002
|       
|       
|       
|       
|99.1    |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
the Sarbanes-Oxley Act of 2002               



---

|* |  | Management contract or compensatory plan or arrangement
|- |  | -------------------------------------------------------

20