UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                    FORM 10-K


(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934

For the fiscal year ended:  September 30, 1998

                        OR

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

For the transition period from ________________ to ________________

Commission File Number: 0-11412


                              AMTECH SYSTEMS, INC.
             ------------------------------------------------------
             (Exact name of Registrant as Specified in its Charter)


          Arizona                                                 86-0411215
-------------------------------                              ------------------
(State or other jurisdiction of                                (I.R.S. Employer
incorporation or organization)                               Identification No.)


 131 South Clark Drive, Tempe, Arizona                               85281
----------------------------------------                          ----------
(Address of Principal Executive Offices)                          (Zip Code)


Registrant's telephone number, including area code: 602-967-5146
                                                    -------------

Securities registered pursuant to Section 12(b) of the Act: None
                                                            -----

Securities registered pursuant to Section 12(g) of the Act:

                          common stock, $.01 Par Value
                          ----------------------------
                                (Title of Class)


                            Redeemable Public Warrant
                            -------------------------
                                (Title of Class)
<PAGE>
         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. [X] Yes [ ] No

         Indicate by check mark if disclosure of delinquent  filers  pursuant to
Item 405 of Regulation S-K is not contained  herein,  and will not be contained,
to the  best of  registrant's  knowledge  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendment to this Form 10-K. [X] Yes

         State the aggregate market value of voting stock held by non-affiliates
of the registrant: $2,848,000 as of December 22, 1998

                   APPLICABLE ONLY TO REGISTRANTS INVOLVED IN
                   BANKRUPTCY PROCEEDINGS DURING THE PRECEDING
                                 FIVE (5) YEARS:

         Indicate by check mark whether the  registrant  has filed all documents
and reports  required  to be filed by Section 12, 13 or 15(d) of the  Securities
Exchange Act of 1934 subsequent to the  distribution of securities  under a plan
confirmed by a court. [ ] Yes [ ] No

                    APPLICABLE ONLY TO CORPORATE REGISTRANTS

         Indicate the number of shares  outstanding of each of the  registrant's
classes of common stock, as of the latest practicable date:  4,232,632 shares of
common stock, $.01 par value, outstanding as of December 3, 1998.

                       DOCUMENTS INCORPORATED BY REFERENCE

         PART III (Items 10-13) is incorporated by reference to the registrant's
proxy statement for the  Registrant's  Annual Meeting of Shareholders to be held
on or about February 26, 1999.

                                       2
<PAGE>
                                TABLE OF CONTENTS
                                                                           Page
                                                                           ----

ITEM 1.  BUSINESS............................................................3
          Background.........................................................3
          Operating Strategy and Industry Overview...........................4
          Products...........................................................6
          Proposed New Products.............................................10
          Manufacturing and Suppliers.......................................11
          Order Backlog.....................................................11
          Research, Development and Engineering.............................11
          Patents...........................................................12
          Sales and Marketing...............................................13
          Competition.......................................................15
          Employees.........................................................16
          Financial Information About Foreign and Domestic Operations
           and Export Sales.................................................16

ITEM 2.  PROPERTIES.........................................................17

ITEM 3.  LEGAL PROCEEDINGS..................................................17

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................17

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
         STOCKHOLDERS'MATTERS...............................................17
          Market Information................................................17
          Holders...........................................................18
          Dividends.........................................................18

ITEM 6.  SELECTED FINANCIAL DATA............................................19

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
         AND RESULTS OF OPERATIONS..........................................20
          Plans For Expansion And Capital Resources.........................20
          Results of Operations.............................................22
          Fiscal 1998 Compared to Fiscal 1997...............................22
          Fiscal 1997 Compared to Fiscal 1996...............................25
          Liquidity And Financial Condition.................................26
          Year 2000 Compliance..............................................27
          Euro Conversion...................................................27
          Forward-Looking Statements........................................27

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................29

ITEM 9.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.................30

ITEM 10. EXECUTIVE COMPENSATION.............................................30

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.....30

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.....................30

ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K...31

SIGNATURES..................................................................34

POWER OF ATTORNEY...........................................................34

                                       i
<PAGE>
                                     PART I

ITEM 1. BUSINESS

BACKGROUND

         Amtech  Systems,  Inc. (the  "Company") was  incorporated in Arizona in
October 1981, under the name Quartz  Engineering & Materials,  Inc., and changed
to its present name in 1987.  The Company also conducts  operations  through two
(2) wholly owned subsidiaries,  Tempress Systems,  Inc. ("Tempress Systems") and
P.R. Hoffman Machine Products, Inc. ("P.R. Hoffman").

         The  Company's  initial  business  was the  manufacture  of  quartzware
implements for sale to and use by  manufacturers  of  semiconductor  chips.  The
Company is currently,  and has been since 1987,  engaged in the  manufacture and
marketing  of  several  items of  capital  equipment  used by  customers  in the
manufacture  of  semiconductors,  two  of  which  are  patented.  The  Company's
Processing/Robotic  product  line  (Atmoscan(R),  IBAL  and  load  stations)  is
designed to enable its  customers  to increase  the degree of control over their
semiconductor  chip   manufacturing   environment  and  to  reduce  exposure  to
contaminants by limiting human contact during the  manufacturing  process.  IBAL
also reduces certain  ergonomic  risks to equipment  operators and wafers during
the manufacturing  process.  In fiscal 1995, the Company began the complementary
business of  producing  and selling  horizontal  diffusion  furnaces  for use in
semiconductor  fabrication,   through  its  wholly  owned  subsidiary,  Tempress
Systems.  In fiscal 1998, the Company,  through its Tempress  operations,  began
producing and selling conveyor  diffusion  furnaces for use in precision thermal
processing of electronic parts.

         In July 1997, the Company acquired  substantially  all of the assets of
P.R. Hoffman Machine Products  Corporation and began developing,  manufacturing,
marketing and selling  double sided  precision  lapping and polishing  machines,
replacement  parts and related  products  including  carriers and  semiconductor
polishing  templates  through its wholly owned subsidiary,  P.R. Hoffman.  These
products are high throughput  precision surface  processing  systems used in the
manufacture  of  semiconductor  wafers,  precision  optics  and other thin wafer
materials,  such as computer  disk media and  ceramic  components  for  wireless
communication devices.

         In the fourth  quarter  of fiscal  1997,  the  Company  began  offering
manufacturing  support  services  to  one of its  Texas-based  customers.  These
services  consist of wet and dry cleaning of  semiconductor  machine  processing
parts.  The Company  intends to offer  manufacturing  support  services to other
customers and third parties as such opportunities become available.

         In 1994, the Company  commenced efforts to develop a new photo chemical
vapor  deposition  ("CVD")  product  for  use  in  semiconductor   manufacturing
facilities, which product would be based upon the Company's existing U.S. patent
on such technology. The Company engaged the University of California, Santa Cruz
(the "University") to conduct a study to determine the feasibility of developing
a CVD product.  This study has proven that the Company's  patented method solves
the problem  inherent in photo CVD  processing,  i.e.  materials being deposited
obstruct  the  ultra-violet  light  used for  activating  the  desired  chemical

                                       3
<PAGE>

reactions.  However,  the study has not yet developed a  photo-assisted  machine
that produces a  commercially  viable rate of  deposition.  In this regard,  the
University's  study has produced  several  generations of higher intensity light
sources,  none of which have  yielded  results  that would enable the Company to
produce a  commercially  viable  product.  As of September 30, 1998, the Company
indefinitely  suspended funding of the CVD research and development efforts as a
result  of the slow down in the  semiconductor  industry  and the slow  progress
being made. See "Operating Strategy and Industry Overview."

         Unless the context otherwise  requires,  the "Company" refers to Amtech
Systems,  Inc., an Arizona corporation,  and its wholly owned subsidiaries.  The
Company's  principal  executive  offices are  located at 131 South Clark  Drive,
Tempe, Arizona 85281 and its telephone number is (602) 967-5146.

OPERATING STRATEGY AND INDUSTRY OVERVIEW

         The Company is engaged  primarily in the  manufacture  and marketing of
several items of capital equipment and related  consumables and spare parts used
by  customers   in  the   manufacture   and   fabrication   of   semiconductors.
Semiconductors,  or  semiconductor  "chips," are made of silicon and are part of
the  circuitry  of  electronic  computers.  The  manufacture  of  semiconductors
involves  many  complex  processing  steps  during  which  silicon  wafers  (the
substrates  from which chips are made) are  inserted in a diffusion  furnace and
subjected to the precise flow of gases under very intense heat.

         The Company  manufactures and sells  horizontal and conveyor  diffusion
furnaces through its wholly owned subsidiary, Tempress Systems. In addition, the
Company  manufactures  and sells a  Processing/Robotic  product line designed to
enable customers using horizontal diffusion furnaces to increase their degree of
control  over  the   manufacturing   environment   and  to  reduce  exposure  to
contaminants  by reducing the amount of human contact  during the  manufacturing
process. Following an industry trend, the size of individual semiconductor chips
has tended to  decrease  while the size of the wafers  from which chips are made
has  tended to  increase.  As a result,  the value of each  wafer has  increased
because  each is the  source of an  increased  number of chips.  As the value of
wafers  increase,  so too does the importance of control over the  manufacturing
environment.

         There  also is a trend in the  semiconductor  industry,  related to the
trend to smaller chips, toward the use in semiconductor manufacturing facilities
of newer technology,  vertical diffusion  furnaces.  Vertical diffusion furnaces
are more  efficient  to use than the  horizontal  diffusion  furnaces in certain
manufacturing  processes  of  smaller  chips on  larger  wafers,  however,  such
furnaces are significantly more expensive to purchase than horizontal  diffusion
furnaces.  The  Company's   Processing/Robotic  product  line  is  useable  with
horizontal diffusion furnaces only.

                                       4
<PAGE>

         The July 1997 addition of P.R.  Hoffman's  product line of double sided
precision lapping and polishing  machines and related products has broadened and
expanded the markets  served by the Company,  which now include  fabricators  of
semiconductor  devices to the  producers  of the  silicon  wafers  used by those
fabricators. Following the P.R. Hoffman acquisition, the Company began marketing
the  P.R.   Hoffman  product  line  through  its  larger  and  more  established
distribution  network.  Similarly,  the Company  began  marketing  its  existing
products to the markets being served by P.R. Hoffman.

        The  Company's  target  market for its  Processing/Robotic  product line
consists  of  customers  who wish to  increase  the  efficiency  and  safety (or
ergonomics) of their existing  semiconductor  manufacturing  facilities equipped
with horizontal diffusion systems.  Through its Tempress System operations,  the
Company  also  provides  its  customers  with  efficient  integrated  horizontal
diffusion furnace systems for use in semiconductor fabrication, and, to a lesser
extent,  conveyor  diffusion  furnace  systems  for  use  in  precision  thermal
processing  of  electronic  parts.  The  Company's  target  market also includes
customers  whose  operations do not require or otherwise  want the higher priced
vertical diffusion furnace systems. Based on market information obtained through
customer and market contacts,  the Company believes that a majority of worldwide
semiconductor  manufacturing  facilities is equipped with  horizontal  diffusion
furnaces,  as  compared  with  vertical  diffusion  furnaces.  While the Company
estimates that each year the percentage of facilities in the world equipped with
vertical systems will become closer to and eventually surpass that of horizontal
systems, it believes that a significant demand for its present product line will
continue  to exist,  although  there can be no  assurance  in that  regard.  The
Company plans to increase its share of the diffusion furnace market by expanding
its manufacture and sales of horizontal  diffusion  furnaces.  In 1996, Tempress
Systems  acquired a modern,  high-tech  manufacturing  facility  in Heerde,  The
Netherlands, for its European operations, and moved its operations into this new
facility.

         The Company's target market for its lapping and polishing  machines and
related   consumables   and  spare  parts  are  producers  of  silicon   wafers,
manufacturers  that use silicon wafers in the fabrication of semiconductors  and
producers of thin wafers made of other materials,  such as quartz,  ceramics and
metals used in the  manufacture  of optics,  computer  storage disks and ceramic
components for wireless  communication  products.  Sales to customers processing
optics and ceramics were 13% of consolidated sales in fiscal 1998. The long-term
demand for silicon wafer lapping and polishing machines and related products has
been  fueled by the  inherent  need of  semiconductor  device  manufacturers  to
continually meet the growing demand for such semiconductors  caused by the rapid
increase  in the uses for such  devices.  In  order to  produce  today's  higher
density chips, semiconductor manufacturers must maintain tighter tolerances with
respect to the surface finish,  flatness and  planerization  of the bare silicon
wafer,  which in turn is requiring  more  polishing  steps and thus more surface
processing  equipment and supplies. A similar trend is occurring in the computer
disk industry as manufacturers  strive to produce higher density drives in order
to satisfy end user demand for greater storage capacity and reduced size.

                                       5
<PAGE>

         INDUSTRY CYCLES AND TRENDS.  Sales of the Company's  products depend in
large part upon the capital  equipment  expenditures  and/or operating levels of
semiconductor  manufacturers,  which depend on current and/or anticipated market
demand for integrated circuits and products utilizing integrated  circuits.  The
semiconductor  industry  is highly  cyclical  and has  historically  experienced
periodic downturns,  which often have had a severe adverse effect on capital and
operating  expenditures by semiconductor  manufacturers.  Semiconductor industry
downturns have and currently are adversely affecting the sales, gross profit and
operating  results of suppliers that serve the industry,  including the Company.
The  industry  is  also   experiencing   the   consolidation   of  semiconductor
manufacturing  operations  through  mergers  and the  subcontracting  out of the
production of semiconductors  to foundries.  The Company believes that growth in
its sales and a return to  profitability  will depend upon increased  demand for
semiconductors.  A continued downturn in the industry and further  consolidation
of semiconductor  manufacturing operations may have a material adverse effect on
the Company's business and results of operations.

         BACKLOG.  In recent years,  the Company has experienced a significantly
greater order backlog than prior  periods.  Those  increases in backlog were due
primarily to the continuing  expansion of Tempress  Systems,  a large multi-year
order and the July 1, 1997 acquisition of the P.R. Hoffman operations. In fiscal
1998, as a result of the turmoil in the Asian financial markets, equipment sales
into that  region  have  significantly  declined.  This  decline,  however,  was
partially offset by re-focusing  sales and marketing efforts on other regions of
the world, including, specifically, the U.S., Spain and Australia.

PRODUCTS

         DIFFUSION FURNACES

         Through its wholly  owned  subsidiary,  Tempress  Systems,  the Company
produces and sells  horizontal and conveyor  diffusion  furnace  systems,  which
generally  include a Tempress(R) load station,  with the Tempress(R)  trademark.
These furnaces utilize existing industry technology for sale to customers who do
not require the advanced  automation  of, or want to incur the major expense of,
acquiring  vertical  diffusion  furnaces.  While the major advantage of vertical
diffusion  furnaces  is their  susceptibility  to  increased  automation,  which
decreases the degree of human intervention in the manufacturing process, the use
of horizontal diffusion furnaces,  with less automation,  is more economical for
larger size chips and multi-model  semiconductor  manufacturing.  While industry
forecasts indicate that overall market demand for horizontal  diffusion furnaces
will decline, the Company believes that a significant niche market will persist.

         The Company started the horizontal diffusion furnace business utilizing
certain acquired assets previously owned by a bankrupt  company,  Tempress B.V.,
located  in  The  Netherlands,  including  the  right  to  use  the  trade  name
"Tempress(R)"  in connection  with such furnaces.  Tempress B.V. was involved in
the  development,  manufacture  and  sale of a  number  of  different  products,
including  a  horizontal  diffusion  furnace.  The right to use the  trade  name
"Tempress"  is also held by three  subsidiaries  of the former  Tempress B.V. in
connection  with the sale of other Tempress  products and services  unrelated to
the horizontal diffusion furnace.  The Company believes,  and sales volume would
appear to  support,  that the  diffusion  furnace  products it designs and sells
under the  "Tempress"  name are gaining  acceptance  by the  Company's  targeted
market.

                                       6
<PAGE>

          In fiscal  1998,  the Company  began  producing  and selling  conveyor
diffusion  furnace  systems  used to  produce  thick  films for the  electronics
industry.  Conveyor furnace systems provide for precision thermal  processing of
electronic  parts for  thick  film  applications,  anneal,  sealing,  soldering,
silvering,  curling,  brazing,  alloying,   gloss-metal  sealing  and  component
packaging.

         PROCESSING/ROBOTIC EQUIPMENT

         ATMOSCAN(R)

         The Company's  "Atmoscan(R)" is a patented controlled environment wafer
processing system for use with horizontal diffusion furnaces. When in use, it is
loaded with wafers and  inserted  into the  diffusion  furnace  under a nitrogen
controlled  environment.  The technology protected by the Company's  Atmoscan(R)
patents is a  processing  method that  includes a  cantilever  tube used to load
silicon  wafers into a diffusion  furnace and through  which a purging inert gas
flows during the loading and unloading processes.

         The Company  believes that among the major  advantages  afforded by the
Atmoscan(R)  product  are  increased  control of the  environment  of the wafers
during the gaseous and heating process, thereby increasing yields and decreasing
manufacturing  costs, and a decreased need for the cleaning of diffusion furnace
tubes, which ordinarily  involves  substantial  expense and equipment down time.
Additional  significant economies in the manufacturing process are also believed
to result.

         The  Company  has  manufactured  and  sold  Atmoscan(R)  units to major
semiconductor  manufacturers  in the United States,  the Pacific Rim and Europe,
including  at  various  times  to   International   Business   Machines,   Intel
Corporation,   Samsung,   Digital  Equipment  Corp.,   Motorola,   SGS-Thompson,
SVG-Thermco  and others.  Sales of Atmoscan(R)  have declined from their peak in
1989, due to an industry trend toward use of vertical diffusion furnaces.

         The Company has designed and sells an open  cantilever  paddle  system,
which  remains the most  commonly used  horizontal  wafer loading  system in the
semiconductor industry. Similar systems have been used by the industry since the
introduction of the Atmoscan(R),  the Company's  alternative to the cantilevered
processing system.

         IBAL AUTOMATION

         "IBAL" is an acronym for "Individual Boats with Automated Loading." The
Company's IBAL  automation  system is a patented  integrated  automation  system
composed of several  modules,  with the base module  being  called  simply IBAL.
Boats are quartz trays that hold silicon  wafers while they are being  processed
in diffusion furnaces. IBAL Trolley is comprised of hardware and software, which
automatically  places boats into Atmoscan(R)  tubes or onto a cantilever  paddle
system  before they are  inserted  in the  diffusion  furnace and  automatically
removes the trays after completion of the process.

                                       7
<PAGE>

         IBAL Butler is a robotics device which further automates the loading of
wafers into the diffusion furnace by automatically  transferring  wafer carriers
onto the IBAL  Trolley for loading  into the  Atmoscan(R)  or on the  cantilever
paddle system for the appropriate furnace tube. IBAL Queue provides a convenient
staging area for the operator to place boats on a load station and automates the
loading  of those  boats  onto the IBAL  Butler.  The first  IBAL Queue unit was
shipped  during the  second  quarter of fiscal  1994.  Use of the IBAL  products
reduces  human  handling  and,   therefore,   reduces   exposure  of  wafers  to
contaminants  during the loading and unloading of the process tubes.  All of the
IBAL modules have been designed by the Company.

         LOAD STATIONS

         The IBAL automation  products described above are offered and sometimes
sold as a complete  system,  mounted on a device called a "load  station," which
also  includes an  ultra-clean  environment  for wafer  loading by filtering and
controlling  the flow of air. The Company  began  shipping  such  high-end  load
stations  in  fiscal  1992.  Those  stations  are  assembled  and  tested in the
Company's  Tempe,  Arizona  facility.  Further,  almost all diffusion  furnaces,
described below,  are sold with either a Tempress(R) load station,  manufactured
in The  Netherlands,  or a high-end  load  station  described  in the  preceding
sentence.

         The Company  believes that sales of its processing and robotic  product
line are more likely to be negatively  impacted by the present industry slowdown
than diffusion furnace sales.  This difference is primarily  attributable to the
fact that  processing  and  robotic  equipment  are more  likely to be viewed by
potential  customers as  discretionary  items, as opposed to diffusion  furnaces
which are integral to a customer's operations.

         DOUBLE SIDED PLANETARY LAPPING AND POLISHING MACHINES

         Through  its  wholly  owned  subsidiary,   P.R.  Hoffman,  the  Company
develops,  manufactures,  markets and sells double sided  precision  lapping and
polishing machines and complementary products including carriers,  semiconductor
polishing  templates and parts.  Double sided lapping and polishing machines are
designed to process wafer type products such as  semiconductor  silicon  wafers,
precision  optics,  computer  disk media and  ceramic  components  for  wireless
communication  devices to exact tolerances of thickness,  flatness,  parallelism
and surface finish. The polishing process is used to change the  characteristics
of the surface of a semiconductor  wafer and a variety of other wafer materials.
Polishing  is a complex  science,  often  involving  multiple  steps,  each at a
specified set of process parameters such as polishing speed, pressure,  time and
temperature. Polishing improves the flatness (planarity), smoothness and optical
properties of a surface.

                                       8
<PAGE>

         Processes  similar to  polishing  include  lapping (a process  where no
polishing  pad is used and the  workpiece  is pressed  into a  polishing  liquid
(slurry)  which is applied to a cast-iron  lapping  wheel).  Lapping  results in
higher  removal rates than  polishing  but produces  rougher  surface  finishes.
Dimensional tolerance,  surface finish, quantity of material to be removed along
with production  rates required and cost of operation are the primary  variables
considered in the determination of the best process for a specific  application.
Polishing and other  surface  treatment  processes  are typically  followed by a
cleaning process.

         The following table summarizes the various models of surface processing
machines produced by the Company and the markets for each of these products:


                   DOUBLE SIDED LAPPING AND POLISHING MACHINES

       MODEL      YEAR INTRODUCED            MARKETS
       -----      ---------------            -------

       PR-1             1938          Quartz
       PR-2             1940          Quartz
       1500             1990          Quartz, ceramics, medical
       1900             1992          Ceramics, optics, computer disks
                                      Computer disks, optics, metal working,
       3100           1995/96         ceramics
                                      Silicon semiconductor, optics, metal
       4800             1981          working, ceramics

         On average,  the Company's surface  processing systems are priced lower
than  competing  systems  offered by  SpeedFam,  Peter  Wolters of America,  and
Lapmaster. The systems offered by the Company's competitors tend to feature more
sophisticated controls and user interfaces, and thus in some applications can be
operated by less skilled employees.

         CARRIERS

         Carriers are workholders where wafers are nested during the lapping and
polishing processes. Carriers are produced for the Company's line of lapping and
polishing machines as well as for competitors' systems. Substantially all of the
carriers are customized for specific  applications.  The Company produces custom
carriers in a variety of sizes,  configurations and materials. A significant and
expanding  category of the Company's  steel  carriers  contain  plastic  inserts
molded  into  the  work-holes  of the  carrier  and are  referred  to as  insert
carriers.  Although  standard steel carriers are preferred in many  applications
because of their durability, rigidity and precise dimensions, they are typically
not  suited  for   applications   involving   softer  materials  or  when  metal
contamination  is an issue.  Steel carriers can cause damage (edge  chipping) to

                                       9
<PAGE>

delicate parts (i.e. larger semiconductor  wafers).  Insert carriers provide the
advantages of steel carriers while reducing the potential of damage to the edges
of sensitive materials.

         The Company  licenses  the design for its steel  carrier  with  plastic
inserts from Wacker GmbH in Germany  ("Wacker").  Under a non-exclusive  license
agreement with Wacker, the Company pays Wacker a 5% royalty for carriers sold by
the Company based on this design. The royalty fee does not apply to sales to the
licensor. The Company believes that the licensor,  despite patenting the design,
is currently unable to consistently  manufacture  insert carriers which properly
hold  the  wafer  in  place  and  the  Company  believes  that  its  proprietary
manufacturing process provides a competitive barrier to entry.

         SEMICONDUCTOR POLISHING TEMPLATES

         The  Company's  single  sided  polishing  templates  are used to polish
silicon  wafers.  Since the  Company  does not  manufacture  surface  processing
machines  for single  sided  applications,  templates  are designed to work with
machines  manufactured  by leading  suppliers  in this  market  segment  such as
SpeedFam,  IPEC, Gigamet and Strasbaugh.  Polishing templates are customized for
specific applications and are manufactured to such exacting tolerances that even
a change in  humidity  of 10% can  result in  unacceptable  mechanical  defects,
performance and durability.

         PLATES, GEARS, WEAR ITEMS AND OTHER PARTS

         The Company produces a wide assortment of plates, gears, parts and wear
items  for  both  its own as  well as for  competitors'  machines.  The  Company
manufactures  approximately  eighty  percent (80%) of the parts that are used in
its machines. In addition to producing standard off-the-shelf parts, the Company
has the ability to produce highly customized parts.

PROPOSED NEW PRODUCTS

        The Company has  patented an  invention  which it believes may become of
significant importance to the semiconductor  manufacturing industry if it can be
developed into a  commercially  viable  product.  From 1994 to 1998, the Company
commissioned  a research  study  conducted by the  University  of  California to
determine the feasibility of developing  semiconductor  manufacturing  equipment
using this patented  invention.  The invention  relates to an improvement to the
CVD process used in the manufacture of certain semiconductors. This improved CVD
process uses ultraviolet light to activate the deposition  reactions rather than
thermal heat or plasma,  which are presently the common means in commercial  CVD
processing.  This  photo-assisted  CVD process is separate and distinct from the
diffusion process in which the Company's  existing products are used and its use
is not limited to facilities  with  horizontal  diffusion  furnaces,  as are the
Company's existing diffusion products. In September 1998, the Company elected to
indefinitely  suspend funding of the  University's  CVD research and development
efforts until such time as the Company  determines its prospects for producing a
commercially  viable  product  have  improved  and the  general  downturn in the
semiconductor industry has shown signs of recovery.

                                       10
<PAGE>

MANUFACTURING AND SUPPLIERS

         The Company  assembles its equipment  and systems from  components  and
fabricated parts manufactured and supplied by others, including quartz and metal
components. Certain parts are fabricated in the Company's machine shops. Certain
of the items  manufactured  by others are made to the Company's  specifications.
All  final  assembly  and  system  tests  are  performed  within  the  Company's
manufacturing/assembly   facilities.   Quality  control  is  maintained  through
incoming  inspection of materials and components,  in-process  inspection during
equipment assembly and final inspection and operation of manufactured  equipment
prior to shipment. The Company's Processing/Robotic product line is manufactured
at  its  Tempe,   Arizona  plant.  The  Company  conducts  similar  engineering,
purchasing and assembly  operations in the manufacture of its diffusion  furnace
line in a building owned and located in Heerde, The Netherlands.

         The  Company's  operations  in Carlisle,  Pennsylvania  are equipped to
perform a high percentage of its manufacturing processes.  Manufacturing at this
facility includes the following: metal stamping, milling, painting,  assembling,
welding,   punching,   cutting,   heat  treating,   machining  and   laminating.
Manufacturing  processes which are typically  subcontracted out by this location
include  plastic  injection,  laser cutting and wire EDM machining,  and complex
electrical  wiring. Key suppliers include two (2) steel mills capable of holding
the type and tolerances the Company requires,  an injection molder that provides
plastic  insets  for steel  carriers,  a pad  supplier  that  produces  a unique
material used to attach  semiconductor  wafers to the polishing  template  (sole
sourced from a Japanese  company),  and adhesive  manufacturer that supplies the
critical glue used in the production of the semiconductor polishing templates.

ORDER BACKLOG

         As of November 30, 1998, the Company's order backlog for  semiconductor
equipment was approximately  $4,800,000 compared to approximately  $5,860,000 at
the same date in the  previous  year.  The  Company  includes in its backlog all
credit approved customer purchase orders.  Orders in the backlog may be canceled
by the customer upon payment of mutually acceptable  cancellation  charges.  The
Company  anticipates  that  substantially  all of its  current  backlog  will be
shipped in fiscal 1999.  Orders generally are shipped within three to six months
of receipt. Accordingly, the backlog may not be a valid measure of revenue for a
future  period.  In addition,  a backlog does not provide any assurance that the
Company will realize a profit from the order.

RESEARCH, DEVELOPMENT AND ENGINEERING

         The  markets  served  by the  Company  are  characterized  by  evolving
industry standards and rapid technological change. To compete effectively in its
markets,  the Company  must  continually  improve its  products  and its process
technologies and develop new technologies and products that compete  effectively
on the basis of price and performance  and that  adequately  address current and
future   customer   requirements.   The  Company's   research  and   development

                                       11
<PAGE>

expenditures  during  fiscal 1996,  1997 and 1998 were  approximately  $325,000,
$280,000 and $438,000, respectively. Due to the suspension of the photo-assisted
CVD project and the general slowdown in the semiconductor  industry, the Company
has reduced its fiscal 1999 budget for research and development to approximately
$190,000.  The Company  intends to develop  new  products in the future that are
complementary  to  the  Company's  existing  product  line  to the  extent  that
resources are available to do so.

         The  Atmoscan(R)  was acquired in 1983 through a licensing  arrangement
with its  inventor,  who was not employed by the Company.  The  Company's  other
products  (excluding  the  Company's  products  acquired  in  the  P.R.  Hoffman
acquisition) were developed by Company  personnel.  The patented  photo-assisted
CVD technology was invented and patent rights were assigned to the Company by an
employee.  The Company  presently  employs at its Tempe,  Arizona  plant,  three
engineers, including one with a Ph.D. and one in the sales department, and three
technicians.  The Company presently  employs eight engineers,  one with a Ph.D.,
and eight technicians in its Netherlands  operation.  These employees design and
support the  horizontal  diffusion  furnace and conveyor  furnace  product lines
manufactured in The  Netherlands.  Two engineers and one technician are employed
in the Company's  Carlisle,  Pennsylvania  operation.  They design wafer lapping
machines and carriers to meet the customers' processing requirements.

         Historically,  the Company's product  development has been accomplished
through  cooperative  efforts  with two key  customers.  While  there  can be no
assurance that such relationships will continue, such cooperation is expected to
continue  to be a  significant  element  in  the  Company's  future  development
efforts. The Company's relationship with one of these customers is substantially
dependent on the personal relations established by the Company's President,  Mr.
Jong S. Whang.

PATENTS

         Generally,  the effect of a patent is that the courts will grant to the
patent  holder the right to prevent  others from  making,  using and selling the
combination  of  elements or  combination  of steps  covered by the patent.  The
Company  has several  United  States  patents on the  Atmoscan(R)  system,  each
reflecting an improvement to or  modification  of the previous  patent.  The two
Japanese  patents on the Atmoscan(R)  cover the first two U.S. patents listed in
the table, below.

         The Company has two United  States  patents on its  photo-assisted  CVD
method, the second being an improvement on the first, and the Japanese patent is
pending on the  photo-assisted  CVD method.  In 1998,  the Company was granted a
patent on it's IBAL Cantilever  Trolley and has a second patent pending which is
an  improvement  on the  first.  The  cantilever,  itself,  load  stations,  the
diffusion furnaces,  lapping and polishing machines,  carriers and semiconductor
polishing templates are not protected by patents.

                                       12
<PAGE>

         The following  table shows the patents  granted and the expiration date
thereof  and the  patents  pending  for the  Company's  products  in each of the
countries listed below:

                                                         EXPIRATION DATE OR
      PRODUCT                    COUNTRY                  PENDING APPROVAL
      -------                    -------                  ----------------

     Atmoscan(R)               United States               July 10, 2001
     Atmoscan(R)               United States               July 2, 2002
     Atmoscan(R)               United States               August 30, 2005
     Atmoscan(R)               Korea                       May 30, 1999
     Atmoscan(R)               Japan                       June 1, 2004
     Atmoscan(R)               Japan                       July 18, 2005
     Atmoscan(R)               European Patent Community
                               - France                    July 18, 2004
                               - Germany                   July 18, 2004
                               - United Kingdom            July 18, 2004
                               - Italy                     July 18, 2004
                               - Netherlands               July 18, 2004
     IBAL Cantilever Trolley   United States               July 10, 2015
     IBAL Cantilever Trolley   United States               Pending Approval
     Photo CVD                 United States               June 1, 2010
     Photo CVD                 United States               November 15, 2011
     Photo CVD                 Japan                       Pending Approval

         The  Company's  ability to compete  may be  enhanced  by its ability to
protect  its  proprietary  information,  including  the  issuance of patents and
trademarks.  While  no  intellectual  property  right  of the  Company  has been
invalidated  or  declared  unenforceable,  there can be no  assurance  that such
rights  will be upheld in the  future.  There  can be no  assurance  that in the
future  products,  processes or technologies  owned by others,  necessary to the
conduct of the Company's  business,  can be licensed on commercially  reasonable
terms.

         In the  normal  course  of  business,  the  Company  from  time to time
receives and makes  inquiries with regard to possible  patent  infringement.  In
dealing with such inquiries,  it may become  necessary or useful for the Company
to obtain and grant licenses or other rights. However, there can be no assurance
that such  license  rights  will be  available  to the  Company on  commercially
reasonable  terms.  Although there can be no assurance about the outcome of such
inquiries,  the Company  believes that it is unlikely that their resolution will
have a  material  adverse  effect on its  results  of  operations  or  financial
condition.

SALES AND MARKETING

         There   are  two   components   of  the   market   for  the   Company's
Processing/Robotic  and  diffusion  furnace  product  line,  which  consists  of
semiconductor manufacturers in the United States, Korea, Western Europe, Taiwan,

                                       13
<PAGE>
Japan,  India,  Australia  and the  People's  Republic of China.  One  component
consists  of  customers  who  are  installing  new  semiconductor  manufacturing
facilities.  The other  component  consists of customers who wish to install new
equipment systems in existing facilities.  The Company's products have been sold
in both  components.  The  Company  has  increased  and  intends to  continue to
increase its share of that market by  expanding  sales of  horizontal  diffusion
furnaces  manufactured by the Company in its Netherlands facility and increasing
its sales, marketing and manufacturing capabilities in Europe. This plan has and
is expected  to increase  revenue  not only  through  added sales of  horizontal
furnaces or Processing/Robotic products, but also by making each of the products
more competitive by offering them as a part of a broader complement of diffusion
products with greater capabilities. For example, the Company expects to generate
increased sales of diffusion  furnaces  because it will offer them together with
Atmoscan(R)  and IBAL  products.  One aspect of this  strategy  is to sell these
products under the  Amtech/Tempress  name, where  appropriate.  The Company also
expects to obtain orders for its new  horizontal  diffusion  furnace from former
Tempress  customers as well as customers  in the United  States,  a large market
that had not been effectively penetrated by Tempress in recent years.

         The  Company has  historically  marketed  its  polishing  machines  and
related  parts and  expendables  to  manufacturers  of  silicon  wafers  for the
semiconductor  industry,  equipment with optical components,  disk media for the
computer industry, and ceramic components for wireless  communication  products.
The Company also sells diffusion furnace and process/robotic products to some of
these customers,  as it did prior to the P.R. Hoffman acquisition.  Further, the
Company  believes the process of sales lead  generation  will be enhanced by the
sharing of leads among its increased  number of product lines,  including  those
acquired in the P.R. Hoffman acquisition transaction.

         The  Company's  installed  base of customers  (facilities  at which the
Company's   products  are  installed  and   operating)   includes  Intel  Lucent
Technologies,   Motorola,   Digital  Equipment,   Texas  Instruments,   National
Semiconductor,  Phillips, SGS-Thomson, Matsushita, Oki, Samsung, Sumitomo Sitix,
Mitsubishi,  Hyundai, ITT Night Vision, UMC and BP Solar. Of these corporations,
Motorola,  Digital Equipment, Intel Corporation,  SGS-Thomson,  and Samsung have
been customers of the Company for approximately 14 years.

         The Company  markets its  products  by direct  customer  contact by the
Company's sales  personnel,  which consists of eight persons based in the United
States,  including  the  President,  the  President of P.R.  Hoffman,  two other
outside  salesmen and an inside sales and marketing  staff of four persons.  The
Company  employs  five sales and  marketing  personnel in The  Netherlands.  The
Company  also   markets  its   products   through  a  network  of  domestic  and
international independent sales representatives and distributors.  The Company's
promotional  activities have consisted of advertising in trade magazines and the
distribution of product brochures. The Company also participates in trade shows,
including Semicon West,  Semicon Europa,  Diskcon and one large optical show per
year.  The Company is dependent on its President,  Jong S. Whang,  for sales and
marketing  activities  in  Asia  and  its  sales  are  enhanced  by  his  active
involvement with the accounts of certain other key customers.

         During  fiscal  1998,  two  customers  accounted  for  12%  and  12%  ,
respectively,  of sales from continuing operations. No other customers accounted
for 10% or more of sales. For a more complete analysis of significant  equipment

                                       14
<PAGE>

customers, see Note 6 of the Notes to Consolidated Financial Statements included
herein (the "Financial Statements").

         There are presently twelve independent sales  representatives  and five
international  distributors,  each covering a specified  geographical area on an
exclusive  basis. The areas now covered by  representatives  are the New England
area, Texas, the United Kingdom, Central Europe (including Germany,  Switzerland
and Austria), France, India, Italy, Korea, Singapore, Malaysia, Taiwan, Thailand
and the People's  Republic of China.  Representatives  are paid a commission  as
specified  from  time to time in the  Company's  commission  schedule,  which at
present is generally  higher for complete  systems and lower for spare parts and
accessories.  Further,  a  discount  has been  granted  to a  customer  who is a
manufacturer of diffusion furnaces.

         Semiconductor  equipment  sales  generally  fluctuate with the level of
capital spending in the semiconductor  industry.  The semiconductor  business is
cyclical.

COMPETITION

         The  Company  is not aware of any  significant  product  that  directly
competes with the Atmoscan(R), however, there are several processing systems and
various   configurations  of  existing   manufacturing  products  which  provide
advantages  similar to those that the Company believes the Atmoscan(R)  provides
to  semiconductor   manufacturers.   Notwithstanding   this   competition,   the
Atmoscan(R)  provides better results in terms of more uniform wafer  temperature
and dispersion of heated gases in the semiconductor  manufacturing process, less
exposure of semiconductor wafers to contaminants, and other technical advantages
which afford to its users a higher yield and,  therefore,  a lower per item cost
in the manufacture of semiconductors. While the industry trend is toward the use
of vertical  diffusion  furnaces (with which  Atmoscan(R)  is not useable),  the
Company  believes that a number of customers are and will continue to be willing
to buy Atmoscan(R) units and horizontal  diffusion  furnaces because for all but
very  large  production  runs  of  smaller  geometry  chips  there  is a  higher
productivity  with  horizontal  furnaces  and because many  applications  do not
involve the  processing of smaller  devices on larger silicon wafers and thus do
not require the much more expensive vertical furnaces.

         The  Company  believes  that there are  several  products in the market
which  perform  the  same  functions  as  the  IBAL  automation  products,  IBAL
Atmoscan(R)  Trolley,  IBAL Cantilever Trolley,  IBAL Butler and IBAL Queue, but
they require more expensive clean room floor space and are more  expensive.  The
IBAL products are intended for customers who do not have or want to dedicate the
additional clean room space required for competing,  more complex systems.  Load
stations are sold to customers that are upgrading their existing facilities with
other  products  of the  Company  or as part of a larger  equipment  package  to
customers  starting-up  new  facilities.  These load stations  provide a cleaner
environment  than those they  replace and the  higher-end  models can reduce the
down-time  for  the  upgrade  or   installation  as  these  load  stations  were
specifically  designed  to  accept  the  Company's  Processing/Robotic  products
without  further  modification.  Products  competitive  with the Company's  load
station are sold by several well-established firms, larger than the Company. The
Company  believes,  however,  that there is a niche market for its load stations
because they can be packaged  with  Atmoscan(R),  IBAL  products  and/or sold in
conjunction with Tempress(R) diffusion furnaces. The cantilever paddle system is

                                       15
<PAGE>

designed  for  easy  assembly  and  disassembly  to  minimize  down-time  during
maintenance.  The Company expects to sell its horizontal  diffusion  furnaces to
customers  who purchase  them in small  quantities  and that it will  maintain a
competitive  position  through its policy of  providing  competitive  prices and
product support services designed for the customer's specific requirements.

         There are  competitors  for the  carriers,  wafer lapping and polishing
machines and related  replacement  parts and semiconductor  polishing  templates
that are  larger  than the  Company.  The  Company  believes  that it is able to
effectively compete with other manufacturers of carriers by continually updating
its  product  line to  keep  pace  with  the  rapid  changes  in its  customers'
requirements.  The Company is able to capture a small share of the semiconductor
polishing template market primarily by meeting the industry's perceived need for
a second  source so as avoid  continued  dependence  upon the dominant  industry
leader. The Company believes that its ability to compete for sales of all of its
products,  including machines, is enhanced by the reputation of its double sided
planetary  lapping  and  polishing  machines,  which  are  highly  regarded  for
applications involving delicate and thin (approximately 100 microns) wafers made
of various  materials.  The Company believes these products compare favorably to
the competition with respect to the following factors:  durability,  maintaining
close thickness  tolerances of wafers and other parts and quality,  reliability,
performance and price.

EMPLOYEES

         At December 4, 1998 the Company employed 89 people (including corporate
officers and 6 contract employees); 48 in manufacturing,  18 in engineering,  10
in  administration,  and 13 in sales.  Of these,  14 are based at the  Company's
offices  and  plant in  Tempe,  Arizona,  24 are  employed  at its  facility  in
Carlisle,  Pennsylvania,  41 at its facility in Heerde, Netherlands,  and 10 for
the Company's  contract  semiconductor  manufacturing  support services business
located in Austin,  Texas. Of the 24 people employed at the Company's  Carlisle,
Pennsylvania  facility,  14 are  represented  by the United Auto Workers Union -
Local 1443.  The Company has never  experienced a work  stoppage or strike.  The
Company considers its employee relations to be good.

           FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS
                                AND EXPORT SALES

         The following  table shows the amounts of revenue  attributable  to the
Company's  foreign sales for the past three fiscal years (the sales to customers
in the United  States are included in the table for  comparison  purposes).  All
foreign sales were associated with non-affiliates.

                            1998                1997                 1996
                     ------------------   ------------------   -----------------
United States (1)    $ 9,029,000    55%   $ 4,227,000    38%   $3,314,000    39%
Far East (2)           1,228,000     8%     3,044,000    27%    3,332,000    40%
Europe (3)             5,030,000    31%     3,840,000    35%    1,768,000    21%
Australia                927,000     6%            --    --            --    --
                     -----------   ---    -----------   ---    ----------   ---
TOTAL                $16,214,000   100%   $11,111,000   100%   $8,414,000   100%
                     ===========   ===    ===========   ===    ==========   ===
----------
(1)  Includes sales in Canada and in Costa Rica in 1998 and 1997.
(2)  Includes Korea,  Singapore,  Taiwan, Japan, the People's Republic of China,
     Singapore, Indonesia, India and Malaysia.
(3)  Includes sales in Israel and Africa, which are not material.

                                       16
<PAGE>

         For a further  description of foreign sales, see Note 6 of the Notes to
the Financial Statements included herein.

ITEM 2. PROPERTIES

         The Company's  semiconductor  equipment  business and corporate offices
are  located  in 9,000  square  feet of office  and  manufacturing  space at its
principal  address.  These facilities are leased at a current rate of $4,400 per
month,  on a  triple  net  basis,  for a term to  expire  on  August  31,  2001.
Manufacturing support is performed in customer facilities.

         The Company also owns a 9,900 square foot  building  located in Heerde,
The  Netherlands.  This facility is expected to provide  adequate  space for the
Company's assembly operations for its furnace line for the foreseeable future.

         The  Company  subleases  a  21,740  square  foot  building  located  in
Carlisle,  Pennsylvania from John R. Krieger,  the president of P.R. Hoffman and
the former owner of that business. These facilities are leased at a current rate
of $10,755 per month, on a triple net basis,  for a term to expire on August 31,
1999. The Company has the option to renew the lease for two successive  terms of
one year each.

         The Company  considers  the above  facilities  suitable and adequate to
meet the Company's requirements.

ITEM 3. LEGAL PROCEEDINGS

         None.

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

         None.
                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
        STOCKHOLDERS' MATTERS

MARKET INFORMATION

         The Company's common stock is traded in the over-the-counter market and
is quoted  under the  symbol  "ASYS" in the  automated  quotation  system of the
National Association of Securities Dealers Small Cap Market ("NASDAQ").

                                       17
<PAGE>

         The following  table sets forth the range of the high and low bid price
for the shares of the  Company's  common  stock for each quarter of fiscal years
1998 and 1997 as reported by the NASDAQ Small Cap Market.

             QUARTER ENDED                 HIGH                        LOW
             -------------                 ----                        ---
     Fiscal 1998:

          December 31, 1997               $ 3.81                     $ 2.00
          March 31, 1998                    3.00                       1.63
          June 30, 1998                     2.63                       1.13
          September 30, 1998                1.34                        .50

     Fiscal 1997:

          December 31, 1996               $ 4.75                     $ 2.38
          March 31, 1997                    4.00                       2.00
          June 30, 1997                     3.63                       2.00
          September 30, 1997                3.50                       2.50

         In order to maintain listing of its common stock on the Nasdaq SmallCap
Market, the Company is required to satisfy certain  quantitative and qualitative
requirements.  On September 22, 1998, the Nasdaq Stock Market, Inc. notified the
Company that it was out of compliance with the requirement to maintain a minimum
bid price of its common  stock of $1.00 per share.  The Company has  requested a
written  hearing  in  order  to  seek an  extension  of time  for  meeting  this
requirement.  If  approved  by the  Company's  shareholders  at its 1999  Annual
Meeting of Shareholders,  the Company intends to effect a reverse stock split of
its outstanding shares of common stock in order to, among other things, increase
the minimum per share bid price of its common stock  sufficiently to satisfy the
$1.00  requirement.  If, however,  the Nasdaq does not grant an extension or the
Company's  common stock fails to satisfy the minimum bid  requirement for ten or
more consecutive  trading days prior to the extended date, the common stock will
be delisted from the Nasdaq SmallCap Market.

HOLDERS

         As of December 3, 1998, there were approximately  1,479 shareholders of
record of the Company's common stock.

DIVIDENDS

         The Company has never paid  dividends.  Its present  policy is to apply
cash  to  investment   in  product   development,   acquisition   or  expansion;
consequently, it does not expect to pay dividends within the foreseeable future.

                                       18
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

         The selected  financial  data set forth with  respect to the  Company's
operations  for each of the years in the three year period ended  September  30,
1998 and with respect to the balance  sheets at September  30, 1998 and 1997 are
derived  from  audited  financial  statements  that have been  audited by Arthur
Andersen LLP,  independent public  accountants,  which are included elsewhere in
this Report and are qualified by reference to such  financial  statements.  Data
from the statements of operations for the fiscal years ended  September 30, 1995
and 1994 and the balance  sheet data at September  30,  1996,  1995 and 1994 are
derived from  financial  statements  not  included in this Report.  The selected
financial  data  should  be  read  in  conjunction  with  Item  7,  Management's
Discussion and Analysis of Financial  Condition and Results of  Operations,  and
the  Company's  Financial  Statements  (including  the  related  notes  thereto)
contained elsewhere in this Report.
<TABLE>
<CAPTION>
                                                    FISCAL YEARS ENDED SEPTEMBER 30,
                                ------------------------------------------------------------------
                                    1998          1997         1996         1995          1994
                                    ----          ----         ----         ----          ----
<S>                             <C>           <C>           <C>          <C>          <C>
OPERATING DATA:
From Continuing Operations:
 Revenues                       $16,213,904   $11,111,142   $8,414,005   $6,864,068   $ 4,331,079
 Operating Profit (Loss)(1)(6)     (904,334)      215,420      120,813       39,582      (172,648)
 Income (Loss) from
  Continuing Operations(1)(6)      (589,887)      237,709      197,591      171,053       (89,469)
Net Income (Loss)(1)(5)(6)      $  (589,887)  $   237,709   $  508,683   $  226,568   $    94,004
Basic Earnings (Loss) Per
 Share: (1)(2)(3)(6)
 Continuing Operations (Loss)   $      (.14)  $       .06   $      .05   $      .04   $      (.05)
 Net Income (Loss) (5)          $      (.14)  $       .06   $      .12   $      .06   $       .05

BALANCE SHEET DATA:
Cash and Short-Term Investments $ 1,351,542   $ 1,975,040   $4,458,337   $4,505,389   $ 1,080,976
Working Capital                   4,993,455     5,271,320    5,480,452    6,163,304     2,244,628
Total Assets                      9,325,479     9,355,092    8,458,614    8,365,519     3,974,922
Total Current Liabilities         2,530,723     2,108,165    1,568,994    1,363,291       852,103
Long-Term Obligations               347,667       318,721      265,355           --            --
Accumulated Deficit                (764,265)     (174,378)    (412,087)    (920,770)   (1,147,338)
Shareholders' Equity(2)(4)        6,447,089     6,928,206    6,624,265    7,002,228     3,122,819
</TABLE>
----------
(1)  The  results  for the  fiscal  years  1998,  1997,  1996 and  1994  include
     approximately  $170,000,  $85,000,  $132,000  and  $355,000,  respectively,
     expensed for amounts paid or payable to the  university  under the Research
     Agreement  described  elsewhere  herein.  In  addition,  in fiscal 1998 the
     Company took a charge of $184,000  for the  write-off of certain long lived
     assets.

(2)  The results  shown have been  restated to reflect the  two-for-one  forward
     split of common  stock which was  effective  March 29,  1996.  Earnings per
     share for 1998, 1997, 1996 and 1995 reflect the sale of 2,415,000 shares in
     a public offering completed December 22, 1994.

(3)  The  results  shown  would be the same if they were  prepared  on a diluted
     basis, except that the net income per common share would have been $.05 for
     the fiscal year ended September 30, 1997 and $.10 for the fiscal year ended
     September 30, 1996.

                                       19
<PAGE>

(4)  The decline in  Shareholders'  Equity in 1996  resulted  from the Company's
     receipt of 196,034 shares of its common stock upon disposition of the stock
     of Echelon  Services  Company,  as  further  detailed  in the  Consolidated
     Statements of Stockholders' Equity,  included in the consolidated financial
     statements.

(5)  The  results  for fiscal 1996  include a $284,335  gain on the  disposal of
     discontinued operations.

(6)  Income from  continuing  operations for fiscal 1997 include a $115,487 gain
     from the  disposition  of the Company's  interest in the Seil Semicon joint
     venture.

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

         The  following  discussion  should  be read  in  conjunction  with  the
financial  statements  and notes  thereto  set forth  elsewhere  herein  and the
"Forward-Looking Statements" explanation included herein.

PLANS FOR EXPANSION AND CAPITAL RESOURCES

         The Company is engaged  primarily in the  manufacture  and marketing of
several items of capital equipment,  spare parts and related consumables used by
customers in the fabrication of semiconductor  chips and  semiconductor  silicon
wafers from which such chips are made. Some of these  products,  amounting to an
estimated 13% of  consolidated  sales in fiscal 1998 and 6% in fiscal 1997,  are
also sold for use in the production of optics, wireless  communications,  memory
disk media,  ceramics and other  products.  The Company also  provides  contract
semiconductor manufacturing support services, accounting for an estimated 6% and
1% of  consolidated  sales in fiscal  1998 and 1997,  respectively.  The Company
intends to focus on expanding  its revenue and  operating  profits  derived from
sale of such  equipment and related  consumable  products sold to  semiconductor
fabricators and  manufacturers of silicon wafers used in the fabrication of such
semiconductors.  The  Company is seeking to expand  its  revenue  and  operating
profits  through the development of new products that serve these markets and to
further penetrate these markets with existing and new products.  The Company has
temporarily  placed a lower priority on the addition of new products or services
through acquisitions as a result of the depressed market price for the Company's
common  stock  and  the  lack  of  available  funds  sufficient  to  complete  a
significant acquisition. That was not the case in fiscal 1997 and the first half
of fiscal 1998.

         ACQUISITIONS.  As a part of the above  strategy,  the Company  acquired
substantially  all of the assets and assumed certain of the related  liabilities
of P.R. Hoffman Machine Products  Corporation on July 1, 1997. The total cost of
the  acquisition,  including  the  liabilities  assumed and related  transaction
costs,  was $3,192,000.  See Note 3 to the  Consolidated  Financial  Statements,
included  herein,  for further details of the acquisition and pro forma revenues
and  earnings  for fiscal  1996 and 1997,  reflecting  the  assumption  that the
acquisition  had  occurred at the  beginning  of each such fiscal  year.  During
calendar year 1996, the operations acquired produced $6.6 million of revenue and
$609,023  of  operating  profit.  Due to  the  slow-down  in  the  semiconductor
industry, fiscal 1998 revenue and operating profit (before corporate allocation)
derived from the P.R. Hoffman  operations,  declined to $5,948,000 and $469,000,
respectively.

                                       20
<PAGE>

         During the fourth quarter of fiscal 1997,  the Company began  providing
contract semiconductor  manufacturing support services.  Although this operation
currently  serves only one customer,  its fiscal 1998 revenue is $906,000 and it
is making a positive  contribution to operating profit. In the event the Company
does not obtain new  customers  for these  services in fiscal 1999,  the Company
expects revenue from these services to decline due to a decrease in the contract
services to be provided to the sole customer.

         During fiscal 1996, the Company entered into a joint venture  agreement
pursuant to which it acquired a 45% ownership interest and a 50% voting interest
in Seil Semicon, Inc. (the "Korean Joint Venture") in return for a commitment to
invest  $500,000 in cash.  The  purpose of the joint  venture was to develop and
operate a silicon test wafer reclaiming business.  After the end of fiscal 1996,
the  Company  sold its  interest  in the joint  venture  for  $478,000,  because
management  determined that increasing the Company's investment commitment to $3
million,  without obtaining majority control, was more risk than was appropriate
for the Company. See Note 11 to the Consolidated Financial Statements,  included
herein.  As a result,  the Company  recorded a gain in fiscal 1997 of  $115,487,
largely  representing  recovery of related  costs and  expenses  recorded in the
previous year.

         While the Company  participated in the Korean Joint Venture in calendar
year 1996 and acquired  P.R.  Hoffman on July 1, 1997,  the Company  shifted its
focus to internal product development in June 1998. The Company intends to again
emphasize acquisitions if and when the market for the Company's common stock has
recovered  or it  has  other  capital  resources  in  excess  of  its  operating
requirements.  Should the Company return to its  acquisition  strategy,  it will
evaluate  potential  product or business  acquisitions  that may  complement the
Company's existing business. Based upon the Company's acquisition criteria, such
an  acquisition  could  require $4 million  or more of  capital  resources.  The
determination of the  appropriateness of a potential  acquisition is expected to
take into consideration many factors, including the status and potential capital
requirements for resuming the  photo-assisted  CVD research  project  (described
below),  the economic terms of the acquisition  under review,  and the potential
synergy of the acquired business with the Company's existing business.  However,
due to the slowdown in the semiconductor  industry,  the amount of time it takes
to bring new products to the market,  and the low market price of the  Company's
common stock,  the Company  believes sales will decline slightly in fiscal 1999,
with a pattern of new growth commencing in fiscal 2000.

         RESEARCH AND DEVELOPMENT.  Prior to fiscal 1994, the Company  generally
made small  investments  in product  development,  relative  to most  technology
businesses.  The Company increased research and product development expenditures
in fiscal 1994 by $257,000,  primarily  through the  expenditure of $355,000 for
photo-assisted  CVD research  conducted by the University of California at Santa
Cruz (the "University").  The Company's aggregate expenditures on photo-assisted
CVD development from fiscal 1994 through September 30, 1998 were $743,000.  This
research has proven that the  Company's  patented  method  solves the problem of
deposited  materials  obstructing the ultra-violet  ("UV") light source used for
activating  the  desired  chemical  reactions.  However,  this  project  has not
resulted in the development of a photo-assisted  CVD machine with a commercially
acceptable  rate of deposition,  because lamps with  sufficient  intensity of UV
light are not yet available. The latter problem coupled with the general

                                       21
<PAGE>

slowdown in the semiconductor  industry has resulted in the Company indefinitely
suspending work on the project effective  September 30, 1998, until such time as
success appears more certain. Before the suspension, fiscal 1998 expenditures to
the University were $170,000, an increase of $85,000 over fiscal 1997.

         During  fiscal  1996,  research  and  development  costs  consisted  of
developing  the new  Tempress  line of  furnaces,  an  automated  robot  to load
cantilever  paddle systems and product  improvements.  In addition,  the Company
expended  $268,000  and  $196,000  in  fiscal  1998 and 1997,  respectively,  on
research  and  development  for the  improvement  and  development  of diffusion
products  and  will  continue  to  make  these  types  of  expenditures  in  the
foreseeable  future.  The Company has budgeted  $158,000 for  development of new
products and  improvements to existing  products in fiscal 1999. The Company may
approve  other  projects  of that  nature,  depending  on  their  merit  and its
anticipated   effect  on  earnings.   Any  expenditure  on  the  development  of
non-diffusion  products and services,  if any, will also  negatively  impact the
Company's future operating results until the project achieves profitability.

         The Company's currently  available cash and short-term  investments are
expected to be sufficient to service the inter-period  liquidity requirements of
the already expanded  operations of the Company.  Therefore,  any funds required
for  significant  unplanned  development  of new  products  and  services  being
considered  are expected to be obtained  from one or more sources of  financing,
such  as  working   capital  or  term  loans  from  banks  or  other   financial
institutions,  equipment leasing,  mortgage  financing and internally  generated
cash  flow  from  operations.  There  is no  assurance  of the  availability  or
sufficiency of these or any other source of funding.

RESULTS OF OPERATIONS

FISCAL 1998 COMPARED TO FISCAL 1997

         REVENUES.  The  consolidated  revenues  increased  by  $5,103,000,   or
forty-six  percent  (46%),  to  $16,214,000  in fiscal 1998 from  $11,111,000 in
fiscal 1997.  During the same period,  operating  income decreased by $1,119,000
from  $215,000 in fiscal 1997 to an  operating  loss of $904,000 in fiscal 1998.
Revenue  derived  from  the  P.R.  Hoffman  operations  and  the  Company's  new
manufacturing  support services  accounted for substantially all of the increase
in consolidated revenue and resulted in a $554,000 increase in operating profit,
before corporate allocations, compared to the fourth quarter of fiscal 1997.

         GROSS  MARGINS.  Revenue from the sale of existing  diffusion  products
increased by $23,000, or less than one percent,  to $9,361,000,  while the gross
margin from these  products  decreased by  $813,000,  or 28%. As a result of the
cyclical downturn the anticipated  increase in sales from diffusion products did
not  materialize.  The gross margin as a percentage  of diffusion  product sales
declined to 23% in fiscal 1998 from 31% in fiscal 1997, as a result of increased
labor and overhead  costs,  price  competition and product mix. The increases in
labor  and  overhead  costs  were made in  anticipation  of  increased  sales of
diffusion  products,  which did not  materialize.  The  industry  slowdown  also
increased  the  amount of price  competition  experienced  during  fiscal  1998.

                                       22
<PAGE>

Finally,  the addition of conveyor  furnaces to the Company's  diffusion product
line  resulted in higher costs because of the short  delivery  schedule for such
products,  as well as higher re-work costs  associated with adding a product not
previously  manufactured.  Overall,  the gross  margin from  consolidated  sales
increased by $624,000,  or 18%, as a result of the P.R.  Hoffman  operations and
manufacturing support services contributing to all four quarters of fiscal 1998,
compared to one quarter's gross margin in fiscal 1997. As a percentage of sales,
the consolidated  gross margin was 26% of sales in fiscal 1998,  compared to 32%
in fiscal  1997.  The  operations  that were new in fiscal  1997 had lower gross
margins  as a  percent  of sales in fiscal  1998 as  compared  to  fiscal  1997,
contributing   further  to  the  decline  in  the   consolidated   gross  margin
percentages.

         SELLING  AND  GENERAL  EXPENSES.  Consolidated  expenses  increased  by
$1,471,000,  or 47%, to  $4,610,000  in fiscal 1998,  from  $3,139,000 in fiscal
1997.  Expenses  attributable to the P.R. Hoffman  operations and  manufacturing
support services directly contributed $884,000 of that increase. That portion of
the  increase in selling and general  expenses  was related to those  operations
being included in the consolidated operating results for four quarters in fiscal
1998 compared to one quarter in fiscal 1997. The selling and general expenses of
the diffusion operation and corporate expenses increased $587,000 as a result of
the  following  factors:  (i) the  addition  of  personnel  and  other  costs in
anticipation  of  higher  revenues;  (ii)  incurrence  of  expenses  related  to
acquisition  research  activities,  particularly  before the  industry  slowdown
affected operations; and (iii) a charge of $184,000 taken by the Company for the
write-off of a  demonstration  unit that is no longer  suitable for  tradeshows.
Despite these increases,  consolidated  selling and general expenses  remained a
constant  28% of  revenue.  Research  and  development  expenses  are  discussed
separately above.

         OPERATING PROFIT (LOSS). Primarily as a result of the cyclical downturn
in the semiconductor  equipment  industry and other factors discussed above, the
Company  had an  operating  loss of  $904,000  in  fiscal  1998  compared  to an
operating  profit of  $215,000 in fiscal  1997.  Income  (loss) from  continuing
operations  before income taxes  includes  operating  income  (loss),  discussed
above, and net interest income. Net interest income was $108,000 lower in fiscal
1998, as compared to fiscal 1997,  due to cash used in the  acquisition  of P.R.
Hoffman and for increased  inventories  and  furniture  and equipment  purchases
associated with the expansion of the Company's  diffusion  furnace product line.
As a result of these items,  income from  continuing  operations  before  income
taxes decreased by $1,228,000 to a loss of $850,000 in fiscal 1998.

         NET INCOME  (LOSS).  As a result of the Company's net loss, the Company
recognized  an income tax benefit of $260,000  in fiscal  1998,  compared to the
fiscal 1997  provision for income taxes of $140,000.  The effective tax rate for
fiscal  1998 is 31%,  which is  lower  than  the 34%  statutory  rate due to the
provision for state income taxes on the Company's  new  operations  and services
and items that are not deductible  for federal income taxes.  The effective rate
for fiscal  1997 was 37%,  3% higher than the  statutory  rate,  due to the same
items as in fiscal 1998. See Note 4 to the Consolidated Financial Statements for
further details  including an analysis of the differences  between the statutory
rate and the  effective  rate  for  fiscal  1998 and  1997.  After  taking  into
consideration the provision for (benefit from) income taxes, the fiscal 1998 net
loss is $590,000,  or $(.14) per share,  compared to net income of $238,000,  or
$.06 per share, in fiscal 1997.

                                       23
<PAGE>

         TRENDS. As a result of the industry slowdown,  consolidated revenue for
the  second  half of  fiscal  1998,  $14,829,000  on an  annualized  basis,  was
substantially lower than the $17,599,000 of annualized revenue in the first half
of the fiscal  year.  Sales for fiscal 1999 are not expected to recover from the
industry  downturn  experienced  in the second half of fiscal 1998.  The Company
believes that there are no  significant  signs of  improvement  in the industry.
Furthermore,  even if the Company is successful in adding new products,  it will
not occur soon enough to have a significant effect on the full year results.

         The fiscal  1998 net losses were all  incurred in the third  ($185,000)
and fourth ($707,000) fiscal quarters. In addition,  the Company's sole customer
for  semiconductor  manufacturing  support  services has requirements for fiscal
1999 that are approximately 50% less than in fiscal 1998.  However,  as a result
of  reductions  in the  number  of  employees  at  all  three  of the  Company's
operations  based in the United  States and other cost  reducing  actions  taken
during the fourth  quarter of fiscal  1998,  the  consolidated  net loss for the
first quarter of fiscal 1999 is expected to be somewhere  between the net losses
of the two  preceding  quarters.  During the first  quarter of fiscal 1999,  the
Company cut costs  further in order to reach a cash-flow  break-even in the last
three  quarters  of fiscal  1999,  although no  assurance  can be made that such
measures will prove effective.

         The Company's  diffusion  product line has been and will continue to be
affected by industry trends.  The use and installed base of vertical furnaces is
increasing  throughout the industry on a worldwide  basis,  particularly for the
fabrication of leading edge semiconductor  devices, and each year it is expected
to increase in usage to and  eventually  surpass  that of  horizontal  furnaces.
However,  the  Company  believes  that  there  will  continue  to be demand  for
horizontal  diffusion  furnaces,  notwithstanding  other  advantages of vertical
systems (e.g. the capability to produce more sophisticated  semiconductors  more
efficiently  through more advanced  automation),  because  generally  production
runs,  other  than those for high  volume  production  of small  chips on larger
wafers,  are more  efficiently  produced in  horizontal  furnaces as compared to
vertical  furnaces.  Due to the  industry  slowdown,  manufacturers  of vertical
furnaces have more aggressively  pursued the sale of their horizontal  furnaces,
which  compete  with those of the  company,  resulting in the erosion of selling
prices and gross margins.

         The  Company's  products  may be used to upgrade,  retro-fit or replace
existing  horizontal furnaces in order to extend their useful lives or otherwise
avoid  the  necessity  for the  customer  to  acquire  more  expensive  vertical
furnaces.  Horizontal  furnaces are also sold for use in new facilities  that do
not require  vertical  furnaces for the particular  process.  Another  important
factor  is  the   growth   of   semiconductor   manufacturing   using  the  less
capital-intensive  horizontal  diffusion  furnaces in the  manufacturer of solar
cells, and for other less demanding  processes,  which could further prolong the
commercial life of the Company's diffusion products.

         The market for the  Company's  products  remains a small niche  market.
Thus future revenues are and will continue to be dependent upon the introduction
or acquisition of new products.  Examples  include the IBAL automation  products
introduced  from fiscal 1991 to fiscal  1993,  or improved  versions of products
that exist in the market, such as the Tempress(R) horizontal diffusion furnaces,
conveyor  ovens and "clean room" load  stations.  The Company  intends to pursue
both  types  of  product  introductions  in  the  future.  Product  or  business

                                       24
<PAGE>

acquisitions are also a part of the Company's  strategy for growth, as evidenced
by the  acquisition  of P.R.  Hoffman's  product line of double sided  precision
lapping and  polishing  machines and related  consumable  products in the fourth
quarter of fiscal  1997.  The Company  intends to again pursue  acquisitions  of
other  businesses or products that  complement its existing  product lines,  but
recognizes that its ability to do so is dependent upon a higher market price for
the Company's common stock and/or the availability of other sources of capital.

         As of December 15, 1998,  memory device  manufacturers are experiencing
stability and even  increases in the price for their  products.  However,  since
there remains ample capacity for the manufacture of all semiconductors, this has
not translated into an improvement for the  semiconductor  production  equipment
market in which the Company competes. Management currently believes that the lag
between  the  improvement  in  the  market  for   semiconductors  and  that  for
semiconductor  equipment is approximately one year.  However,  it is anticipated
that improvement in the sales of the Company's  consumable and replacement parts
will precede the improvement in equipment sales.  Turmoil in the Asian financial
markets is expected to continue to significantly depress capital equipment sales
into that region. As expected, sales into the Asian market declined to 8% of the
Company's  total  sales in fiscal  1998,  down from 27% in  fiscal  1997.  These
negative factors have a greater impact on the higher margin Atmoscan(R) and IBAL
automation  products  than  on  diffusion  furnace  sales.  The  reason  for the
difference  is that the Atmoscan and IBAL  products are more likely to be viewed
as  discretionary  as opposed to  diffusion  furnaces  which are  integral  to a
customer's operations.  The Company's products are sold on a worldwide basis and
therefore,  the Company will attempt to offset the sales declines  caused by the
above factors by focusing more attention on other regions of the world.

FISCAL 1997 COMPARED TO FISCAL 1996

         The  consolidated  revenues  of the  semiconductor  equipment  business
increased $2,697,000, or thirty-two percent (32%), to $11,111,000 in fiscal 1997
from  $8,414,000  in fiscal  1996.  During  the same  period,  operating  income
increased  seventy-eight percent (78%), or $94,000, from $121,000 in fiscal 1996
to $215,000 in fiscal 1997. The  acquisition and start-up  businesses  discussed
above accounted for sixty-six  percent (66%) of the increase in revenue and more
than all of the increase in operating  profit,  despite their inclusion for only
the fourth quarter of fiscal 1997.

         Revenue  from  the  sale  of  existing   diffusion  products  increased
$923,000, or eleven percent (11%), to $9,337,000,  and accounted for thirty-four
percent  (34%) of the  increase in  consolidated  revenue.  Growth in  diffusion
product revenue resulted  primarily from continued  expansion of The Netherlands
operation, where the Tempress(R) diffusion furnaces are manufactured. The growth
in gross margins  resulting from the increase in diffusion product sales was not
sufficient to offset the $435,000  increase in the related selling,  general and
administrative  expenses.  Further,  expanded  furnace  sales,  which  typically
produce  a lower  gross  margin,  were  partially  offset  by a  decline  in the
typically more profitable automation products,  thereby producing an unfavorable
mix.  The gain on the  disposal  of the Korean  Joint  Venture  described  above
partially compensated for the decrease in consolidated  operating profit for the
diffusion product line.

                                       25
<PAGE>

         Income (loss) from continuing  operations  before income taxes includes
operating income (loss),  discussed above, and net interest income. Net interest
income was $64,000 lower in fiscal 1997, as compared to fiscal 1996, due to cash
used in the  acquisition  of P.R.  Hoffman  and for  increased  inventories  and
receivables  associated  with the expansion of the diffusion  product line. As a
result of these items, the income from continuing operations before income taxes
improved by $30,000, or 9%, to $378,000 in fiscal 1997.

         The income tax  provision  is $140,000  in fiscal 1997 and  $150,000 in
fiscal 1996. The effective tax rate for fiscal 1996 is higher than the statutory
rate and the effective rate of fiscal 1997,  because the equity in the losses of
the Korean Joint  Venture were not  deductible  for U.S.  income tax purposes in
fiscal  1996,  when  incurred,  but were  deductible  upon  disposition  of that
investment.  See Note 4 to the  consolidated  financial  statements  for further
details including an analysis of the differences  between the statutory rate and
the effective rate for fiscal 1997 and 1996. After taking into consideration the
provision for income taxes, income from continuing operations is $238,000,  $.06
per share,  for fiscal 1997, a 20% improvement  over the income of $198,000,  or
$.05 per share, in fiscal 1996.

         For  fiscal  1997,  net  income  is equal  to  income  from  continuing
operations,  $238,000,  or $.06 per share.  The  non-recurring  $284,000 gain in
fiscal 1996 from the disposal of  discontinued  operations and $27,000 of income
before  disposition  of that  operation,  brought  net income for fiscal 1996 to
$509,000, or $.10 per share.

LIQUIDITY AND FINANCIAL CONDITION

         As  of  September  30,  1998  and  1997,  cash,  cash  equivalents  and
short-term investments amounted to $1,352,000 and $1,975,000,  respectively. The
fiscal 1998 decrease in cash and cash equivalents of $623,000, resulted from the
$310,000 of cash used in operations,  primarily for the financing of inventories
and $313,000 for purchases of property and equipment.  While the Company expects
to make up to $270,000 of capital  expenditures  during  fiscal 1999,  and up to
$190,000 for research and development, actual expenditures will be made in light
of the expected benefits and the existing operating climate.  As a result of the
above,  the  Company   believes  there  is  sufficient   liquidity  for  current
operations. However, see "Plans for Expansion and Capital Resources," above, for
an  explanation of factors that would give rise to  requirements  for additional
sources of liquidity and capital resources, and possible sources of such to meet
those needs.

         Working  capital  decreased by $278,000 to  $4,993,000 at September 30,
1998,  from  $5,271,000,  a decrease of 5%,  primarily  as a result of expending
working capital on the purchase of property and equipment. For the same reasons,
the ratio of  current  assets to  current  liabilities  increased  to 3.0:1 from
3.5:1.  Cash  and  short-term  investments  comprise  14% of  total  assets  and
stockholders'  equity  accounts for 69% of total  assets.  These are measures of
financial  condition.  The Company  believes that despite the recent losses,  it
continues  to posses  the  financially  strength  to plan  future  growth  while
surviving the current industry slowdown.

                                       26
<PAGE>

YEAR 2000 COMPLIANCE

         Many currently  installed  computer  systems and software  products are
coded to accept two digit entries in the date code field. These date code fields
will need to accept four digit  entries to  distinguish  21st century dates from
20th century dates. Any programs that have time-sensitive software may recognize
a date using "00" as the year 1900 rather than the year 2000.  This could result
in the computer shutting down or performing incorrect computations. As a result,
in a little over one year,  computer systems and software used by many companies
may need to be upgraded to comply with such "Year 2000" requirements. Certain of
the Company's systems,  including information and computer systems and automated
equipment, will be affected by the Year 2000 issue.

         The  Company  is  in  the   process  of   identifying   the   programs,
infrastructure,  and products  that could be affected by the Year 2000 issue and
is developing an  implementation  plan to resolve the problem on a timely basis.
Based on a preliminary,  informal review of the hardware and software components
of its systems and  products,  the  Company  anticipates  that the plan will not
require it to devote a  considerable  amount of internal  resources or otherwise
hire substantial  external  resources to assist with the  implementation of such
plan. The Company  expects that the costs to be incurred by it to deal with this
issue will be not be material,  as many of the issues were  resolved  before the
end of fiscal 1998, through installation of regular software updates provided by
licensors under standard maintenance agreements. The Company does not anticipate
that any problems  encountered  by suppliers and vendors in connection  with the
Year  2000 will  have a  material  adverse  effect  on the  Company's  financial
condition and results of operations.

EURO CONVERSION

Effective January 1, 1999, the European Monetary Union (the "Union") will result
in the  issuance of a single  currency  (the  "euro")  for use in  participating
countries,  including The Netherlands,  where one of the Company's operations is
based.  See Note 7 to the  Consolidated  Financial  Statements.  The Company has
assessed  the  effects  of the  change to a single  currency  within  the Union,
including  the  need  to  modify  certain   computer   systems.   The  Company's
expenditures for Euro conversion projects were immaterial in fiscal 1998 and are
expected to be immaterial in fiscal years 1999 and 2000.

FORWARD-LOOKING STATEMENTS

         This  Annual  Report  on Form  10-K  contains  certain  forward-looking
statements. The forward-looking statements contained herein are based on current
expectations  that involve a number of risks and  uncertainties.  Among  others,
these  forward-looking  statements are based on assumptions that (a) the Company
will not lose a  significant  customer or  customers,  (b) the Company  will not
experience  significant further reductions in demand or rescheduling of customer
purchase  orders that have occurred  recently due to equipment  buyers'  caution
resulting from over-capacity for the production of semiconductor chips, (c) that
the Company's  products will remain accepted within their respective markets and
will not be significantly  further replaced by newer technology  equipment,  (d)
that  competitive  conditions  within the Company's  markets will not materially
deteriorate  further, (e) that the Company efforts to integrate its P.R. Hoffman
subsidiary will continue to progress,  (f) that the Company's efforts to improve
its products and maintain its  competitiveness  in the markets it competes  will
continue to progress  and that the savings  associated  with these  expenditures
and/or  the  increased  product  demand  resulting   therefrom  justifies  these

                                       27
<PAGE>

development costs, (g) that the Company will be able to retain, and when needed,
add key  technical  and  management  personnel,  (h) that  business  or  product
acquisitions,  if any,  will be  successfully  integrated  and  the  results  of
operations  therefrom will support the acquisition price, (i) that the Company's
forecasts will accurately  anticipate  market demand,  (j) that there will be no
material  adverse  changes in the  Company's  exiting  operations,  (k) that the
Company's  plan for a reverse stock split will be approved by  shareholders  and
will  enable the  Company  to avoid the  de-listing  of its common  stock by the
NASDAQ  Small-Cap  Market,  (l) the  Company  will be able to obtain  sufficient
equity or debt  funding to increase its capital  resources by the amount  needed
for  new  business  or  product  acquisitions,  if any,  (m)  the  semiconductor
equipment  industry will recover from the current  slowdown,  (n) the turmoil in
the  Asian  markets  will not  spread to other  geographic  regions  or  further
deteriorate, (o) the Company has or will be able to reduce costs sufficiently to
avoid using a substantial  portion of its current liquidity to fund losses,  (p)
there will be no material Year 2000 issues and (q) that demand for the Company's
products will not be adversely and significantly influenced by trends within the
semiconductor industries, including consolidation of semiconductor manufacturing
operations  through  mergers and the  subcontracting  out of the  production  of
semiconductors  to  foundries.  Assumptions  related  to the  foregoing  involve
judgments with respect to, among other things, future economic,  competitive and
market conditions,  and future business  decisions,  all of which are beyond the
control of the  Company.  Although  the Company  believes  that the  assumptions
underlying the forward-looking statements are reasonable, any of the assumptions
could  prove  inaccurate  and,  therefore,  there can be no  assurance  that the
results  contemplated  in  forward-looking   statements  will  be  realized.  In
addition,  the business and operations of the Company are subject to substantial
risks,  which  increase  the  uncertainty   inherent  in  such   forward-looking
statements.   In  light  of  the  significant   uncertainties  inherent  in  the
forward-looking  information  included herein, the inclusion of such information
should not be regarded as a representation by the Company,  or any other person,
that the objectives or plans for the Company will be achieved.

                                       28
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                                      INDEX

                                                                         Page
                                                                         ----

Report of Independent Public Accountants..................................F-1

Financial Statements -

   Consolidated Balance Sheets
   September 30, 1998 and 1997............................................F-2

   Consolidated Statements of Operations for
   the years ended September 30, 1998, 1997 and 1996......................F-3

   Consolidated Statements of Stockholders'
   Equity for the years ended September 30,
   1998, 1997 and 1996....................................................F-4

   Consolidated Statements of Cash Flows for
   the years ended September 30, 1998, 1997 and 1996......................F-5

   Notes to Consolidated Financial Statements
    September 30, 1998, 1997 and 1996.....................................F-7

Financial Statement Schedule for the years ended
  September 30, 1998, 1997 and 1996:

   Schedule II - Valuation and Qualifying Accounts........................S-1


         All Schedules, other than the Schedule listed above, are omitted as the
information is not required, is not material or is otherwise furnished.

                                       29
<PAGE>

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To AMTECH SYSTEMS, INC.:

We have audited the accompanying  consolidated balance sheets of AMTECH SYSTEMS,
INC. (an Arizona  corporation)  and  subsidiaries  as of September  30, 1998 and
1997,  and the related  consolidated  statements  of  operations,  stockholders'
equity and cash flows for each of the three years in the period ended  September
30, 1998. These consolidated  financial statements are the responsibility of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
consolidated financial statements based on our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all  material  respects,  the  financial  position of AMTECH  SYSTEMS,  INC. and
subsidiaries  as of  September  30,  1998 and  1997,  and the  results  of their
operations  and cash  flows  for each of the  three  years in the  period  ended
September 30, 1998, in conformity with generally accepted accounting principles.

Our  audits  were  made for the  purpose  of  forming  an  opinion  on the basic
financial  statements  taken as a whole.  The  schedule  listed  in the index of
financial  statements  and  supplementary  data is  presented  for  purposes  of
complying  with the  Securities  and  Exchange  Commission's  rules and is not a
required  part  of the  basic  financial  statements.  This  schedule  has  been
subjected  to the  auditing  procedures  applied  in  our  audits  of the  basic
financial statements and, in our opinion, fairly states in all material respects
the  financial  data  required to be set forth  therein in relation to the basic
financial statements taken as a whole.



                                                  ARTHUR ANDERSEN LLP


Phoenix, Arizona,
 December 14, 1998.

                                       F-1

<PAGE>
                      AMTECH SYSTEMS, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                           September 30, 1998 and 1997

                                                          1998          1997
                                                      ----------   ----------
                                     ASSETS
CURRENT ASSETS:
 Cash and equivalents (Note 2)                        $1,351,542   $1,395,849
 Short-term investments (Note 2)                              --      579,191
 Accounts receivable, less allowance for
  doubtful accounts of $143,000 in 1998
  and $130,000 in 1997 (Note 6)                        2,894,217    2,983,573
 Inventories (Note 2)                                  2,393,708    2,062,052
 Deferred income taxes (Notes 2 and 10)                  393,000      273,000

 Income taxes refundable (Notes 2 and 10)                404,000           --
 Prepaid expenses                                         87,711       85,820
                                                      ----------   ----------
          Total current assets                         7,524,178    7,379,485
                                                      ----------   ----------
PROPERTY, PLANT AND EQUIPMENT (Note 2):
   Land, building and leasehold improvements (Note 4)    610,507      629,604
   Equipment and machinery                               935,280      785,142
   Furniture and fixtures                                498,634      726,365
                                                      ----------   ----------
                                                       2,044,421    2,141,111
Less accumulated depreciation and
  amortization                                          (801,405)    (781,078)
                                                      ----------   ----------
                                                       1,243,016    1,360,033
                                                      ----------   ----------
PURCHASE PRICE IN EXCESS OF NET ASSETS
  ACQUIRED AND OTHER ASSETS, net of
  accumulated amortization of $237,000 in 1998
  and $200,000 in 1997 (Notes 2 and 3)                   558,285      615,574
                                                      ----------   ----------
                                                      $9,325,479   $9,355,092
                                                      ==========   ==========

                      LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
  Accounts payable                                    $1,229,451   $  935,338
  Accrued compensation and related taxes                 573,294      541,916
  Accrued warranty expense (Note 2)                      166,839      200,670
  Accrued installation expense                           183,909      169,199

  Customer deposits                                      249,795           --
  Other accrued liabilities                              127,435      138,042

  Income taxes payable (Notes 2 and 10)                       --      123,000
                                                      ----------   ----------
          Total current liabilities                    2,530,723    2,108,165
                                                      ----------   ----------

LONG-TERM OBLIGATIONS (Note 4)                           347,667      318,721
                                                      ----------   ----------

COMMITMENTS AND CONTINGENCIES (Notes 3, 5, 8 and 9)

STOCKHOLDERS' EQUITY (Notes 2 and 12):
  Preferred stock; no specified terms;
   100,000,000 shares authorized; none issued                 --           --
  Common stock; $.01 par value; 100,000,000 shares
   authorized; 4,220,606 (4,185,106 in 1997) shares
   issued and outstanding                                 42,206       41,850
  Additional paid-in capital                           7,385,486    7,345,187
  Cumulative foreign currency translation adjustment    (216,338)    (284,453)
  Accumulated deficit                                   (764,265)    (174,378)
                                                      ----------   ----------
          Total stockholders' equity                   6,447,089    6,928,206
                                                      ----------   ----------
                                                      $9,325,479   $9,355,092
                                                      ==========   ==========
                  The accompanying notes are an integral part
                     of these consolidated balance sheets.

                                      F-2
<PAGE>
                      AMTECH SYSTEMS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
              For The Years Ended September 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
                                                           1998           1997           1996
                                                        -----------    -----------    ----------
<S>                                                     <C>             <C>             <C>
Net product sales (Note 6)                              $16,213,904    $11,111,142    $8,414,005
Cost of product sales                                    12,069,780      7,591,347     5,516,936
                                                        -----------    -----------    ----------
   Gross margin                                           4,144,124      3,519,795     2,897,069

Selling, general and administrative (Note 2)              4,610,238      3,139,366     2,386,466
Equity in (income) losses of Korean
  joint venture (Note 13)                                        --       (115,487)       65,063
Photo-CVD project (Notes 2 and 5)                           170,306         84,883       132,243
Other research and development (Notes 2 and 5)              267,914        195,613       192,484
                                                        -----------    -----------    ----------
   Operating profit (loss)                                 (904,334)       215,420       120,813

Interest income-net                                          54,447        162,289       226,778
                                                        -----------    -----------    ----------
Income (loss) from continuing
   operations before income taxes                          (849,887)       377,709       347,591
Income tax provision (benefit) (Notes 2 and 10)            (260,000)       140,000       150,000
                                                        -----------    -----------    ----------

INCOME (LOSS) FROM CONTINUING OPERATIONS                   (589,887)       237,709       197,591
                                                        -----------    -----------    ----------
DISCONTINUED OPERATIONS:
Income From Discontinued Operations (Note 14)                    --             --        26,757
Gain on Disposal of Echelon (Notes 10 and 14)                    --             --       284,335
                                                        -----------    -----------    ----------
                                                                 --             --       311,092
                                                        -----------    -----------    ----------

NET INCOME (LOSS)                                       $  (589,887)   $   237,709    $  508,683
                                                        ===========    ===========    ==========

BASIC EARNINGS (LOSS) PER SHARE (Notes 2, 11 and 12):
  Income (Loss) From Continuing Operations              $      (.14)   $       .06    $      .05
  Net Income (Loss)                                     $      (.14)   $       .06    $      .12
  Weighted average shares outstanding                     4,213,482      4,168,111     4,175,728


DILUTED EARNINGS (LOSS) PER SHARE (Notes 2, 11 and 12):
  Income (Loss) From Continuing Operations              $      (.14)   $       .05    $      .04
  Net Income (Loss)                                     $      (.14)   $       .05    $      .10
  Weighted average shares outstanding                     4,213,482      4,697,942     5,343,606
</TABLE>

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

                                      F-3
<PAGE>
                      AMTECH SYSTEMS, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
              For The Years Ended September 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
                                                             Cumulative
                                Common Stock                  Foreign
                            -------------------  Additional   Currency                    Total
                             Number of            Paid-In   Translation  Accumulated  Stockholders'
                              Shares    Amount    Capital    Adjustment    Deficit       Equity
                            ---------  -------  ----------  -----------  -----------  ------------
<S>                       <C>        <C>      <C>         <C>          <C>          <C>
BALANCE AT
 SEPTEMBER 30, 1995         4,305,702  $43,057  $7,850,482  $  29,459    $(920,770)   $ 7,002,228
Net Income                         --       --          --         --      508,683        508,683
Shares returned upon
   disposition of Echelon    (196,034)  (1,960)   (806,679)        --           --       (808,639)
Translation adjustment             --       --          --    (78,007)          --        (78,007)
                            ---------  -------  ----------  ---------    ---------    -----------

BALANCE AT
 SEPTEMBER 30, 1996         4,109,668   41,097   7,043,803    (48,548)    (412,087)     6,624,265
Net income                         --       --          --         --      237,709        237,709
Employee stock bonus           16,050      160      34,577         --           --         34,737
Stock options exercised        27,000      270      34,930         --           --         35,200
Shares and warrants issued
 in connection with the
 acquisition ofP.R. Hoffman
 assets (Note 3)               32,388      323     231,877         --           --        232,200
Translation adjustment             --       --          --   (235,905)          --       (235,905)
                            ---------  -------  ----------  ---------    ---------    -----------

BALANCE AT
 SEPTEMBER 30, 1997         4,185,106   41,850   7,345,187   (284,453)    (174,378)     6,928,206
Net loss                           --       --          --         --     (589,887)      (589,887)
Employee stock bonus           17,500      176      24,229         --           --         24,405
Stock options exercised        18,000      180      16,070         --           --         16,250
Translation adjustment             --       --          --     68,115           --         68,115
                            ---------  -------  ----------  ---------    ---------    -----------
BALANCE AT
 SEPTEMBER 30, 1998         4,220,606  $42,206  $7,385,486  $(216,338)   $(764,265)   $ 6,447,089
                            =========  =======  ==========  =========    =========    ===========
</TABLE>

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

                                      F-4
<PAGE>
                      AMTECH SYSTEMS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
              For The Years Ended September 30. 1998, 1997 and 1996
<TABLE>
<CAPTION>
                                                              1998          1997          1996
                                                           ----------   -----------   ----------
<S>                                                        <C>          <C>           <C>
OPERATING ACTIVITIES:
 Net income (loss)                                        $ (589,887)  $   237,709   $  508,683
 Adjustments to reconcile net income to net
   cash provided by (used in) operating activities:
   Depreciation and amortization                              361,046       233,938      179,289
   Inventory and accounts receivable write-offs               135,642        76,123       91,085
   Gain on disposal of discontinued operations                     --            --     (284,335)
   Loss (gain) on disposals of long-lived assets              183,872           592       (1,950)
   Equity in (income) losses of Korean joint venture               --      (115,487)      65,063
   Deferred income taxes                                     (120,000)      (50,000)     (70,000)
 (Increase) decrease in:
   Accounts receivable                                        160,719      (401,561)     212,067
   Inventories, prepaids and other assets                    (429,450)     (421,270)    (284,872)
 Increase (decrease) in:
   Accounts payable                                           240,963       191,544      160,152
   Accrued liabilities                                        269,048       222,828      254,814
   Income taxes payable/refundable                           (522,059)      (21,000)     (81,000)
                                                           ----------   -----------   ----------
   Net cash Provided by (Used In) Operating Activities       (310,106)      (46,584)     748,996
                                                           ----------   -----------   ----------
INVESTING ACTIVITIES:
 Maturities of short-term investments - net                   579,191     1,884,929    1,207,449
 Proceeds from disposition of (investment in)
   unconsolidated Korean joint venture                             --       475,047     (425,000)
 Proceeds from sale of assets                                   2,241           200       28,983
 Purchases of property, plant and equipment                  (313,203)     (236,852)    (541,919)
 Cash paid for net assets of P. R. Hoffman
   Machine Products Corporation                                    --    (2,569,580)          --
 Cash distributed in disposal of Echelon                           --            --     (109,698)
                                                           ----------   -----------   ----------
   Net Cash Provided by (Used in) Investing Activities        268,229      (446,256)     159,815
                                                           ----------   -----------   ----------
FINANCING ACTIVITIES:
 Proceeds from stock options exercised (Note 12)               16,250        35,200           --
 Proceeds from (Payments on) mortgage loan                    (12,069)      (19,635)     288,297
                                                           ----------   -----------   ----------
   Net Cash Provided By Financing Activities                    4,181        15,565      288,297
                                                           ----------   -----------   ----------

EFFECT OF EXCHANGE RATE CHANGES                                (6,611)     (121,093)     (36,711)
                                                           ----------   -----------   ----------
CASH AND EQUIVALENTS (Note 2):
  Net increase (decrease)                                     (44,307)     (598,368)   1,160,397
  Beginning of year                                         1,395,849     1,994,217      833,820
                                                           ----------   -----------   ----------

END OF YEAR CASH AND EQUIVALENTS                           $1,351,542   $ 1,395,849   $1,994,217
                                                           ==========   ===========   ==========
</TABLE>

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

                                      F-5
<PAGE>
                      AMTECH SYSTEMS, INC. AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
              For The Years Ended September 30. 1998, 1997 and 1996


                                                    1998       1997       1996
                                                  --------   --------   --------

SUPPLEMENTAL CASH FLOW INFORMATION:

  Cash paid during the year for:

Interest                                          $ 15,731   $ 19,855   $  5,376
      Income taxes, net of refunds                 387,411    216,000    327,000

SUPPLEMENTAL SCHEDULE OF NON-CASH
  INVESTING AND FINANCING ACTIVITIES:

    Value received in the form of the
      Company's $.01 par value common
      stock in exchange for the net assets
      of Echelon Service Company (Note 14)              --         --    808,639



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

                                      F-6
<PAGE>
                      AMTECH SYSTEMS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997, AND 1996


(1) NATURE OF OPERATIONS:

         Amtech Systems,  Inc. (an Arizona  corporation),  P. R. Hoffman Machine
Products, Inc., a wholly-owned subsidiary formed in July 1997 ("P. R. Hoffman"),
both based in the United  States,  and Tempress  Systems,  Inc., a  wholly-owned
subsidiary  formed in September 1994 and based in The Netherlands,  comprise the
"Company". The Company designs,  assembles, sells and installs capital equipment
and related  consumables used in the manufacture of wafers of various materials,
primarily  silicon  wafers  for  the  semiconductor  industry,  and  in  certain
semiconductor fabrication processes. These products are sold to manufacturers of
silicon wafers and semiconductors worldwide,  particularly in the United States,
Korea,  and Northern  Europe.  During fiscal 1997,  the Company began  providing
semiconductor manufacturing support services. See Note 14 regarding discontinued
operations.

        One of the  requirements  for  maintaining  the listing of the Company's
common  stock on the NASDAQ  Small-Cap  Stock Market is that the bid price be at
least $1.00 per share.  The price of the Company's common stock has been trading
below that price for several months. The Company has received notice from NASDAQ
that the Company must respond to the notice or its stock will be de-listed.  The
Company  has  requested  a hearing at which it will  request  time to remedy the
situation.  If necessary,  the Company  intends to effect a reverse split of the
stock.  While this strategy did remedy a similar situation in fiscal 1993, there
can be no assurance  that this  strategy  will again restore the market price to
$1.00 or more or that such price  will be  maintained.  The loss of it's  NASDAQ
Small-Cap  listing could result in further  deterioration  of the market for the
Company's common stock.

        The Company serves a niche market in an industry which experiences rapid
technological advances and which in the past has been very cyclical.  Therefore,
the Company's future  profitability  and growth depend on its ability to develop
or acquire  and  market  profitable  new  products  and its  ability to adapt to
cyclical trends.


(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

        BASIS  OF  PRESENTATION  -  The  accompanying   consolidated   financial
statements  include the  accounts of Amtech  Systems,  Inc. and its wholly owned
subsidiaries,  including  Echelon  Service  Company  through  the  date  of  its
disposition  (Note  14),  P.  R.  Hoffman  Machine  Products,   Inc.  since  its
acquisition   date  (Note  3)  and  Tempress   Systems,   Inc.  All  significant
intercompany accounts and transactions have been eliminated in consolidation.

        REVENUE  RECOGNITION  - Revenue is  recognized on the accrual basis when
the product is shipped and title passes to the customer.

        CASH  EQUIVALENTS  AND  SHORT-TERM  INVESTMENTS - Cash  equivalents  and
short-term investments consist of time certificates of deposit and U.S. treasury
bills.  The Company  considers  certificates of deposit and treasury bills to be
cash  equivalents  if their  maturity is 90 days or less from date of  purchase.
Investments maturing in more than 90 days are

                                      F-7
<PAGE>
                      AMTECH SYSTEMS, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)

considered  to be  "available-for-sale"  (as defined by  Statement  of Financial
Accounting  Standards  (SFAS) No. 115) and are  recorded  at fair  value,  which
approximates cost.

        INVENTORIES  -  Inventories  are stated at the lower of cost  (first-in,
first-out  method) or market.  The  components  of inventory as of September 30,
1998 and 1997 are as follows:

                                   1998               1997
                                ----------         ----------
        Purchased parts         $1,174,570         $  995,850
        Work-in-progress           612,646            618,295
        Finished Goods             606,492            447,907
                                ----------         ----------
                                $2,393,708         $2,062,052
                                ==========         ==========

        PROPERTY,  PLANT AND EQUIPMENT - Maintenance  and repairs are charged to
expense as incurred.  The costs of additions and  improvements  are capitalized.
The cost of property  retired or sold and the related  accumulated  depreciation
are removed from the  applicable  accounts  and any gain or loss is  recognized.
Depreciation  expense  for fiscal  years 1998,  1997 and 1996 was  approximately
$273,000, $196,000 and $152,000, respectively.

        Depreciation is computed using the  straight-line  method.  Useful lives
for  equipment,  machinery  and  leasehold  improvements  are from three to five
years;  for  furniture  and fixtures  from five to ten years;  and for buildings
twenty years.

        The Company has adopted SFAS No. 121,  "Accounting for the Impairment of
Long-Lived  Assets and for  Long-Lived  Assets to be Disposed of." This standard
requires that  long-lived  assets be reviewed for impairment  whenever events or
circumstances  indicate  that  the  carrying  amount  of the  asset  may  not be
recoverable.  If the sum of the expected cash flows from an asset to be held and
used in operations is less than the carrying  value of the asset,  an impairment
loss is recognized.  Adoption of this standard did not have a material effect on
the Company's financial position or results of operation.

        Due to model  changes,  the  Company has  reviewed a Tempress  diffusion
furnace built for use at tradeshows and determined that the net present value of
future  cash flows it can  expect  from this  furnace is less than the  carrying
value of the asset.  Accordingly,  a loss of  $184,028,  the cost of the furnace
less   accumulated   depreciation,   is  included   in   selling,   general  and
administrative expense in fiscal 1998.

        PURCHASE PRICE IN EXCESS OF NET ASSETS  ACQUIRED - The purchase price in
excess of net  assets  acquired,  commonly  referred  to as  goodwill,  is being
amortized  over  fifteen  years  using the  straight-line  method.  Amortization
expense for fiscal years 1998, 1997 and 1996 was approximately  $44,000,  $9,000
and $0, respectively.

                                      F-8
<PAGE>
                      AMTECH SYSTEMS, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)

        WARRANTY  - The  Company  generally  provides  free of  charge a limited
twelve-month warranty to all purchasers of its new products and systems. Current
liabilities  include  approximately  $167,000 and $201,000 for accrued  warranty
expense as of September 30, 1998 and 1997,  respectively.  Warranty  expense for
fiscal 1998,  1997 and 1996  amounted to  approximately  $240,000,  $267,000 and
$135,000,  respectively.  Management  believes this amount is sufficient for all
future warranty costs on systems sold through September 30, 1998.

        RESEARCH  AND  DEVELOPMENT  EXPENSES  -  The  Company  expenses  product
development  costs  as they are  incurred.  The  Company  incurred  expenses  of
approximately  $438,000 in 1998, $280,000 in 1997, and $325,000 in 1996, related
to research of  photo-assisted  CVD (chemical  vapor  deposition)  equipment and
processes,  the development of diffusion  furnaces,  and the improvement of IBAL
and other products.

        FOREIGN CURRENCY  TRANSACTIONS  AND TRANSLATION - Financial  information
relating to the Company's foreign subsidiary is reported in accordance with SFAS
No. 52,  "Foreign  Currency  Translation".  Income  from  continuing  operations
includes a loss from foreign currency  transactions of $11,000 in 1998 and gains
of $34,000 in 1997 and  $56,000 in 1996.  The  functional  currency  of Tempress
Systems, Inc. is The Netherlands guilder. The gains or losses resulting from the
translation of the financial statements of the Company's foreign subsidiary have
been included as a separate component of shareholders' equity.

        INCOME TAXES - The Company files consolidated federal income tax returns
and computes  deferred income tax assets and  liabilities  based upon cumulative
temporary   differences   between   financial   reporting  and  taxable  income,
carryforwards available and enacted tax law. See Notes 10 and 14.

        EARNINGS  PER COMMON  SHARE - The  Company  has  adopted  SFAS No.  128,
"Earnings Per Share." The new statement  modifies the calculation of primary and
fully  diluted EPS and replaces  them with basic and diluted EPS. All prior year
earnings per share (EPS) data  presented  have been restated as required by SFAS
No. 128. See Note 11.

        STOCK-BASED  COMPENSATION  - The Company  accounts  for its  stock-based
compensation  plans under Accounting  Principles Board Opinion APB No. 25, under
which no  compensation  cost is  recognized.  In  October  1995,  the  Financial
Accounting  Standards  Board  ("FASB")  issued  SFAS  No.123,   "Accounting  for
Stock-Based  Compensation."  SFAS No.123  requires  companies  that  account for
stock-based  compensation  as prescribed by APB No. 25 to disclose the pro forma
effects on earnings  and  earnings per share as if SFAS No. 123 had been adopted
and  certain  other  information  with  respect  to stock  compensation  and the
assumptions  used to determine  the pro forma  effects of SFAS No. 123. See Note
12.

                                      F-9
<PAGE>
                      AMTECH SYSTEMS, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)

        USE OF ESTIMATES - The preparation of financial statements in conformity
with  generally  accepted  accounting  principles  requires  management  to make
estimates  and  assumptions  that  affect  the  reported  amounts  of assets and
liabilities  and disclosure of contingent  assets and liabilities at the date of
the  financial  statements  and the  reported  amounts of revenues  and expenses
during the year. Actual results could differ from those estimates.

        FAIR  VALUE  OF  FINANCIAL  INSTRUMENTS  - The  carrying  values  of the
Company's current assets and current  liabilities  approximate fair value due to
the short-term in which these  instruments  mature.  The  carrying  value of the
Company's  long-term debt  approximates  fair value because the interest rate of
the mortgage note payable (Note 4)  approximates  prevailing  interest rates for
similar debt instruments.

        ACCOUNTING  PRONOUNCEMENTS  NOT YET  ADOPTED  - In June  1997,  the FASB
issued  SFAS No.  130,  "Reporting  Comprehensive  Income,"  and  SFAS No.  131,
"Disclosures About Segments of an Enterprise and Related  Information." SFAS No.
130 establishes  standards for reporting and displaying of all changes in equity
that result from  transactions  and other economic events  occurring  during the
period,  other than  transactions  with  owners  ("comprehensive  income"),  and
requires   companies  to   retroactively   display  the   cumulative   total  of
comprehensive  income,  other  than net  income  for the  period,  as a separate
component of equity in both interim and annual  financial  statements.  SFAS No.
131  establishes a new model for interim and annual  segment  reporting,  taking
into  consideration the way management  organizes  segments for making operating
decisions and assessing  segment  performance.  The Company is required to adopt
these standards in fiscal 1999.  Management has not assessed the effect of these
standards on future disclosures.

(3) PURCHASE OF P. R. HOFFMAN MACHINE PRODUCTS' ASSETS:

        On July 1, 1997, the Company  acquired  substantially  all of the assets
and operating liabilities of P. R. Hoffman Machine Products  Corporation.  P. R.
Hoffman   specializes  in  the   development,   manufacture   and  marketing  of
double-sided  lapping and polishing machines and related consumables used in the
manufacture of semiconductor  silicon wafers.  The purchase method of accounting
is being used for this acquisition,  and therefore,  the accompanying statements
include  the  results  of the  operations  of P. R.  Hoffman  since  the date of
acquisition.

      The cost of the acquisition is summarized as follows:
      Cash                                                    $2,308,000
      Liabilities assumed                                        382,000
      Acquisition transaction costs                              270,000
      Issuance of 32,388 shares of common stock                   65,000
      Issuance of 150,000 warrants (Notes 11 and 12)             167,000
                                                              ----------
       Total cost of acquisition                              $3,192,000
                                                              ==========

                                      F-10
<PAGE>
                      AMTECH SYSTEMS, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


(3) PURCHASE OF P. R. HOFFMAN MACHINE PRODUCTS' ASSETS - (CONTINUED)

      The cost of the acquisition was allocated as follows:
      Accounts Receivable                                     $1,122,000
      Inventory                                                1,060,000
      Property                                                   421,000
      Other assets and liabilities                                35,000
      Purchase price in excess of net assets acquired            554,000
                                                              ----------
           Total                                              $3,192,000
                                                              ==========

        The  valuation  of the  common  stock  issued in  connection  with these
transactions  was determined  based on the fair market value of the common stock
on the date of  issuance,  taking into  account  the  illiquidity  arising  from
restrictions  on the sale of the  stock.  The  purchase  price in  excess of net
assets  acquired  commonly  referred to as  "goodwill"  is being  amortized on a
straight-line basis over a period of 15 years.

        In  addition  to the above  purchase  price,  the former  owner of P. R.
Hoffman Machine Products Corporation is entitled to additional payments equal to
50% of pretax  income of the P.R.  Hoffman  operation  in excess of $800,000 per
year for a period of 5 years after the year ended September 30, 1997, limited to
a maximum  aggregate of $2 million of such payments.  The additional  contingent
purchase  price of up to $2  million is  payable  in a  combination  of cash and
unregistered and registered  common stock of Amtech Systems,  Inc. as defined in
the Asset Purchase Agreement.  This additional  consideration will be treated as
part of the purchase  price to the extent earned and will be amortized  over the
remainder of the fifteen year period that began on the July 1, 1997  acquisition
date. No contingent consideration was earned in fiscal 1998 or 1997.

        As a part of the transaction, the Company subleases a 21,740 square foot
building, located in Carlisle, Pennsylvania, from John R. Krieger, the president
and former  owner of the P.R.  Hoffman  operation.  The lease  requires  monthly
payments  of  $10,755,  on a triple net basis,  expires  on June 30,  1999,  and
includes an option to renew the lease for two consecutive  one-year  terms.  The
Company  also entered  into an  employment  agreement  with Mr.  Krieger,  which
requires payments of $150,000 per year and expires on June 30, 2001.

        The following  consolidated pro forma financial information was prepared
assuming that the acquisition had occurred at the beginning of each fiscal year.
This  pro  forma  information  does  not  necessarily  reflect  the  results  of
operations  that would have  occurred  had the  acquisition  taken  place at the
beginning of each fiscal year and is not necessarily  indicative of results that
may be obtained in the future (unaudited):

                                      F-11
<PAGE>
                      AMTECH SYSTEMS, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


(3) PURCHASE OF P. R. HOFFMAN MACHINE PRODUCTS' ASSETS - (CONTINUED)

                                                   1997            1996
                                               -----------      -----------
       Revenues                                $16,121,577      $15,028,672
       Income from continuing operations           575,069          355,643
       Net income                                  575,069          666,735

       Earnings per share:
        Income from continuing operations      $       .11      $       .08
        Net income                             $       .11      $       .13

        For  purposes  of the  above  pro  forma  presentation,  the  historical
revenues  and  earnings  of P. R.  Hoffman  for the twelve  month  period  ended
September 30, 1997 and the year ended  December 31, 1996 have been combined with
the revenues and earnings of the Company for the years ended  September 30, 1997
and 1996, respectively. Therefore, both columns include the operating results of
P. R. Hoffman for the three months ended December 31, 1996, including $1,332,814
of revenues and $227,591 of operating losses.

(4) LONG-TERM OBLIGATIONS:

        Long-term debt included in long-term  obligations includes a twenty year
mortgage  secured by the Company's land and building located in The Netherlands.
The  long-term  debt  portion  of this  debt was  $215,000  and  $216,000  as of
September  30,  1998 and 1997,  respectively.  As of  September  30,  1998,  the
collateral  has a  carrying  value of  $406,000.  Principal  is  payable  in The
Netherlands  guilder  in 240 equal  monthly  payments.  Principal  payments  are
$13,000 for each of the next four  years,  with the  payments  for 1999 and 1998
included  with accounts  payable as of September 30, 1998 and 1997.  Interest is
fixed at 6.95%  through June 2001,  after which the rate will be adjusted to the
prevailing  market rate.  There is a penalty for prepayment of the loan prior to
June 2001.

        In October 1998,  the Company was granted a line of credit in the amount
of  approximately  $375,000,  the  equivalent  of  750,000  of The  Netherlands'
guilders at an interest  rate of 2% over a  Netherlands  bank's  basic  interest
rate,  3.75% as of October 31, 1998. The line of credit is secured by a $125,000
second  mortgage  on the  Company's  land and  building in the  Netherlands  and
certain  accounts  receivable,  which amounted to $1,754,000 as of September 30,
1998.

                                      F-12
<PAGE>
                      AMTECH SYSTEMS, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


(5) COMMITMENTS AND CONTINGENCIES:

        During March 1994, the Company  entered into a research and  development
contract (the "Research  Agreement") with and paid $355,405 to the University of
California at Santa Cruz (the "University").  That amount was expensed in fiscal
1994. The Company's  purpose for entering into the contract was to determine the
feasibility and demonstrate the practical  application of the Company's patented
photo-assisted  chemical vapor deposition  ("CVD")  process.  The University has
developed  designs  and  specifications  for  a  prototype  model  of a  product
embodying the Company's technology and used it to conduct the initial study. The
University has also proven that Amtech's  patented  method solves the problem of
deposited  materials  obstructing  the  ultra-violet  light used to activate the
desired   chemical   reactions.   However,   the  study  has  not   developed  a
photo-assisted  machine that produces a commercially  viable rate of deposition.
Due to economic  circumstances and delays in achieving the goals of the research
project,  the Company  has  suspended  work,  until  success  appears to be more
certain.  There can be no  assurance  that the tools  required to  increase  the
prospects  of  success  will  become  available  in time to make  further  study
economically   attractive.   Costs  of  the  Research  Agreement  are  reflected
separately  in the  Consolidated  Statement of  Operations.  Other  research and
development  includes  the  cost of  internal  personnel  and  related  expenses
incurred on several projects, including the photo-assisted CVD project.

        Key suppliers  include two (2) steel mills, one domestic and one German,
capable  of  meeting  the  material  specifications  the  Company  requires,  an
injection molder that provides plastic insets for steel carriers; a pad supplier
that  produces  a unique  material  used to attach  semiconductor  wafers to the
polishing  template  (sole  sourced  from a Japanese  company);  and an adhesive
manufacturer  that  supplies the  critical  glue used in the  production  of the
semiconductor polishing templates. The Company has unconditional  commitments to
purchase  $386,000 of German steel, all of which the Company is required to take
or pay  for in  fiscal  1999.  Due to long  lead times,  certain  minimum  order
quantities,  the  slow-down  in the  semiconductor  industry and  quantities  of
similar  steel in inventory it could take several  years to use all of the steel
commitments  in production of the Company's  products.  However,  these purchase
commitments are not expected to result in any significant losses.

                                      F-13
<PAGE>
                      AMTECH SYSTEMS, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


(6) MAJOR CUSTOMERS AND FOREIGN SALES:

        The Company had major  customers  accounting for more than 10% of sales,
which were different in each of the three years presented, as follows:

                                          1998         1997         1996
                                          ----         ----         ----
        Customer 1                         --           --           17%
        Customer 2                         --           --           10%
        Customer 3                         --           --           10%
        Customer 4                         --           --           10%
        Customer 5                         --           16%          --
        Customer 6                         --           16%          --
        Customer 7                         12%          --           --
        Customer 8                         12%          --           --
                                          ---          ---          ---
                                           24%          32%          47%
                                          ===          ===          ===

        As of  September  30, 1998 and 1997,  receivables  from three  customers
comprise  43% and  55% of  accounts  receivable,  respectively,  representing  a
concentration  of  credit  risk as  defined  by SFAS  No.  105,  "Disclosure  of
Information  about  Financial  Instruments  with   Off-Balance-Sheet   Risk  and
Financial Instruments with Concentrations of Credit Risk".

        The  Company's  sales  were to  customers  in the  following  geographic
regions:

                                                        1998    1997    1996
                                                        ----    ----    ----
        United States & Canada                           55%     38%     39%
          (including 1% or less to Costa Rica)
        Far East (Korea, People's Republic of China,      8%     27%     40%
          Taiwan, Japan, Singapore, Indonesia,
        Malaysia and India)
        Europe (including 1% or less to Africa)          31%     35%     21%
        Australia                                         6%     --      --
                                                        ---     ---     ---

                                                        100%    100%    100%
                                                        ===     ===     ===

                                      F-14
<PAGE>
                      AMTECH SYSTEMS, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


(7) FOREIGN OPERATIONS AND GEOGRAPHIC INFORMATION:

        The Company has  manufacturing  operations  in the United States and The
Netherlands.  Revenues,  operating  profit  (loss)  and  identifiable  assets by
geographic  region of the  locations  for the fiscal years ended 1998,  1997 and
1996 are as follows:

                                     1998             1997           1996
                                  -----------     -----------     ----------
        Revenues
          United States           $10,481,408     $ 5,321,240     $3,369,915
          The Netherlands           5,732,496       5,789,902      5,044,090
                                  -----------     -----------     ----------
                                  $16,213,904     $11,111,142     $8,414,005
                                  ===========     ===========     ==========
        Operating profit (loss)
          United States           $  (376,754)    $  (146,742)    $   89,893
          The Netherlands            (527,580)        362,162         30,920
                                  -----------     -----------     ----------
                                  $  (904,334)    $   215,420     $  120,813
                                  ===========     ===========     ==========
        Identifiable Assets
          United States           $ 5,855,188     $ 7,173,662     $6,006,169
          The Netherlands           3,470,291       2,181,430      2,452,445
                                  -----------     -----------     ----------
                                  $ 9,325,479     $ 9,355,092     $8,458,614
                                  ===========     ===========     ==========
(8) LEASES:

        The Company leases  buildings,  vehicles and equipment.  As of September
30, 1998 minimum rental commitments under noncancellable  operating leases total
$281,000, of which $156,000,  $69,000,  $52,000 and $4,000 are payable in fiscal
1999, 2000, 2001 and 2002, respectively.

        Rental expense related to continuing operations, net of sublease income,
for  1998,  1997 and 1996 was  approximately  $234,000,  $98,000  and  $108,000,
respectively.

(9) PROPRIETARY PRODUCT RIGHTS:

        The Company acquired the proprietary product rights to Atmoscan in 1983,
which  provides an improved  method for the automatic  loading of silicon wafers
into diffusion  furnaces.  The Company has agreed to pay the inventor  royalties
for 17 years until  November  22,  2000.  From the first  quarter of fiscal 1994
through the year 2000,  royalties are 4% on sales of complete  Atmoscan  systems
and 2% on any related spare parts.

        Through  the  acquisition  of the net  assets of P. R.  Hoffman  Machine
Products  Corporation  (see Note 3), the  Company  acquired  the license for the
design of its steel  carriers  with plastic  inserts for  abrasive  machining of
silicon wafers. In 1995, P. R. Hoffman licensed

                                      F-15
<PAGE>
                      AMTECH SYSTEMS, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


(9) PROPRIETARY PRODUCT RIGHTS - (CONTINUED)


the patent  rights  from  Wacker  Siltronics.  Royalties  are 5% on net sales of
insert carriers to third parties.

        Royalty expense included in cost of product sales totaled  approximately
$82,000, $44,000 and $47,000 in 1998, 1997 and 1996, respectively.

(10) INCOME TAXES:

        The provision for (benefit  from) income taxes on continuing  operations
consists of:
                                     1998         1997          1996
                                  ---------     ---------     --------
        Current
          Domestic federal        $ (28,000)    $ (32,000)    $158,000
          Foreign                  (133,000)      202,000       54,000
          Domestic State             21,000        20,000        8,000
                                  ---------     ---------     --------
                                   (140,000)      190,000      220,000
                                  ---------     ---------     --------
        Deferred
          Domestic federal          (70,000)     (125,000)     (16,000)
          Foreign                   (45,000)       77,000      (54,000)
          Domestic State             (5,000)       (2,000)          --
                                  ---------     ---------     --------
                                   (120,000)      (50,000)     (70,000)
                                  ---------     ---------     --------
                                  $(260,000)    $ 140,000     $150,000
                                  =========     =========     ========

        The  provision  for income taxes on  continuing  operations is different
from the amount that would be computed by applying the United  States  corporate
income tax rate to the income (loss) from  continuing  operations  before income
taxes. The differences as of September 30 are summarized as follows:

                                              1998         1997         1996
                                           ---------     --------     --------
        Tax provision (benefit) at the
          federal statutory rate           $(289,000)    $128,000     $118,000
        Effect of expenses not deductible
          for tax                             19,000       19,000        3,000
        State tax provision                  (38,000)      23,000       28,000
        Effect of losses of Korean joint
          venture                                 --      (22,000)      22,000
        Change in valuation allowance         54,000        3,000      (20,000)
        Other items                           (6,000)     (11,000)      (1,000)
                                           ---------     --------     --------
        Income tax provision (benefit)     $(260,000)    $140,000     $150,000
                                           =========     ========     ========

                                      F-16
<PAGE>
                      AMTECH SYSTEMS, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


(10) INCOME TAXES - (CONTINUED)

        The tax assets (liabilities) comprising the net deferred tax asset as of
September 30, 1998 and 1997 are as follows:

                                                            1998         1997
                                                         ---------    ---------
        Allowance for doubtful accounts                  $  54,000    $  40,000
        Uniform capitalization of inventory costs           50,000       48,000
        Inventory write-downs not currently deductible      71,000       23,000
        Book vs. tax depreciation                          (27,000)     (19,000)
        Unrealized currency losses/(gains)                  35,000      (24,000)
        State net operating loss carryforwards              72,000       63,000
        Liabilities not currently deductible               253,000      203,000
        Valuation allowance                               (115,000)     (61,000)
                                                         ---------    ---------
                                                         $ 393,000    $ 273,000
                                                         =========    =========

        In evaluating the probability of realizing its deferred tax assets,  the
Company has limited its  recognition  of deferred tax assets to those tax assets
which management believes are more likely than not to be realized. The remaining
deferred tax assets have been offset by the valuation allowance.

        See  Note 14  regarding  the  income  tax  treatment  of the gain on the
disposal of discontinued operations.

                                      F-17
<PAGE>
                      AMTECH SYSTEMS, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


(11) EARNINGS (LOSS) PER COMMON SHARE:

        All  prior  year  earnings  per share  (EPS)  data  presented  have been
restated as required by SFAS No. 128. EPS were calculated as follows:

                                            1998          1997         1996
                                         ----------    ----------   ----------
        Net income (loss)                $ (589,887)   $  237,709   $  508,683

        WEIGHTED AVERAGE
        SHARES OUTSTANDING:
         Common stock                     4,213,482     4,168,111    4,175,728
         Common stock equivalents
          issuable upon exercise
          of warrants and stock
          options (1)                            --       529,831    1,167,878
                                         ----------    ----------   ----------
                                          4,213,482     4,697,942    5,343,606
                                         ==========    ==========   ==========
        EARNINGS (LOSS) PER SHARE:
         Basic                           $     (.14)   $      .06   $      .12
                                         ==========    ==========   ==========

         Diluted                         $     (.14)   $      .05   $      .10
                                         ==========    ==========   ==========
     ----------
     1.   Number of common stock equivalents calculated using the treasury stock
          method and the average market price during the period.  In fiscal 1998
          all options and warrants,  totaling 3,371,584,  were anti-dilutive due
          to the net loss and therefore did not enter into the EPS  calculation.
          Of these options and warrants, 3,291,584 had an exercise price greater
          than the average market price during the period.

(12)  STOCK BASED COMPENSATION:

        The Company accounts for its stock-based  compensation  prior to October
1995, under APB No. 25, under which no compensation expense has been recognized,
as all options and warrants granted have an exercise price equal to or in excess
of the fair market  value of the  Company's  common  stock on the date of grant.
Since the effective date of SFAS No. 123, the Company has applied this method of
accounting for stock-based compensation to grants to employees of the Company.

        Effective  with the close of business on March 29,  1996,  each share of
the $.01 par value  common  stock of the Company  (the "common stock") was split
into two shares.  All shares and per share  amounts  have been  restated to give
effect for this two-for-one forward stock split.

                                      F-18
<PAGE>
                      AMTECH SYSTEMS, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


(12) STOCK BASED COMPENSATION - (CONTINUED)

        STOCK  WARRANTS - In fiscal  1995,  the Company  issued an  aggregate of
2,625,000  redeemable  warrants to the public  (2,415,000)  and the  underwriter
(210,000) in connection with a secondary public offering, which have an exercise
price of $2.75  per share  and  expire on  December  15,  1999.  The  redeemable
warrants  are  subject  to the  Company's  right of  redemption,  under  certain
circumstances,  at $.05 each during the period in which they are exercisable. In
connection  with the public  offering,  the Company  also sold the  underwriting
group warrants  entitling the group to purchase an additional  210,000 shares at
$2.25 per share anytime prior to December 15,1999.

        In connection  with the  acquisition  of the net assets of P.R.  Hoffman
during  fiscal 1997,  the Company  issued  150,000  warrants for purchase of one
share  each of $.01 par  value  common  stock at a per share  exercise  price of
$3.00.  These  warrants  have been  valued at $167,200  using the  Black-Scholes
valuation  method  discussed  in Note 2.  The  primary  assumptions  used in the
valuation of these  warrants were a risk free rate of 6.29%,  expected  dividend
yield of 0%, average holding period of 2.5 years, and 69% volatility.  The value
of these warrants has been included in the goodwill associated with the purchase
of the P. R. Hoffman net assets.

        STOCK OPTION PLANS - The board of directors  has reserved  50,000 shares
of common stock for issuance upon exercise of the outstanding  options issued to
employees  under the 1983  Incentive  Stock Option Plan,  which expired in 1993.
Another  30,000  shares of common  stock are  reserved for the exercise of stock
purchase  rights granted to directors  under Director Stock Purchase  Agreements
prior to 1995. The Non-Employee  Directors Stock Option Plan was approved by the
stockholders in 1996 for the issuance of up to 200,000 shares of common stock to
directors.  The Amended and  Restated  1995 Stock Option Plan and the 1995 Stock
Bonus Plan were also  approved  by  stockholders  in 1996 under which a combined
total of 320,000  shares were  authorized.  The 1998 Employee Stock Option Plan,
under which 100,000 shares may be optioned, was adopted by the board of director
on January 31, 1998 and approved by  shareholders  on March 20, 1998. All of the
plans with the  exception  of the 1983  Incentive  Stock  Option Plan  Incentive
expire in 2006.  All stock  options  issued under the terms of the plans have or
will have an exercise  price equal to or greater  than the fair market  value of
the  common  stock at the date of the  option  grant and expire no later than 10
years from the date of grant,  with the most recent grant expiring  February 28,
2008. Under the terms of the 1995 Stock Option Plan,  nonqualified stock options
also may be issued.  Options issued in fiscal years 1998,  1997 and 1996 vest at
the rate of 20% - 25% per year.  Shares  granted under the 1995 Stock Bonus Plan
totaled  50,000 in 1995 and 8,500 in 1996,  of which  12,000 were  forfeited  in
1996. As of September 30, 1998,  the Company had 269,000  options  available for
issuance under the plans.

                                      F-19
<PAGE>
                      AMTECH SYSTEMS, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


(12) STOCK BASED COMPENSATION - (CONTINUED)

        The stock option  transactions and the options outstanding for the three
years ended September 30, 1998, are summarized as follows:

                                                 Number of     Weighted-Average
                                                  Options       Exercise Price
                                                  -------       --------------
        Outstanding at September 30,1995          147,000           $ 1.40
          Expired                                 (14,000)            1.08
                                                  -------

        Outstanding at September 30,1996          133,000           $ 1.32
          Granted                                 282,084             2.50
          Exercised                               (27,000)            1.07
          Expired                                  (6,000)            1.63
                                                  -------

        Outstanding at September 30,1997          382,084             2.17
          Granted                                  54,000             2.33
          Exercised                               (18,000)             .90
          Expired or forfeited                    (33,500)            2.23
                                                  -------

        Outstanding at September 30,1998          384,584             2.26
                                                  =======
        Outstanding options exercisable as of:
          September 30, 1996                       81,000             1.52
          September 30, 1997                       50,000             1.45
          September 30, 1998                       98,000             2.37

        In fiscal 1998 and 1997 the number of incentive  stock options issued to
employees, net of forfeitures,  were 7,000 and 264,000,  respectively,  and they
were  valued at $17,000  and  $440,000,  respectively,  using the  Black-Scholes
valuation method. Had the effects of stock-based compensation been accounted for
in the  financial  statements  for fiscal  1998,  the net (loss) would have been
approximately  ($681,000)  and the basic and diluted (loss) per share would have
been $.16 per share. Had the effects of stock-based  compensation been accounted
for in the financial  statements for fiscal 1997, the net income would have been
approximately  $187,000 and the basic and diluted per share would have been $.04
per share. The primary assumptions used in the valuation were a weighted average
risk free rate of 6.23%,  an expected  dividend yield of 0%, holding  periods of
four to eight  years and 69%  volatility.  No  adjustment  has been made for the
non-transferability  of the options or for the risk of forfeiture at the time of
issuance. Forfeitures are instead recorded as incurred.

        As of September 30, 1998 the Company's 384,584 outstanding stock options
had a weighted  average  remaining  contractual life of 7.6 years and a range of
exercise  prices of $1.03 to $3.31.  In addition,  as of September  30, 1998 the
Company  had  97,917  of  exercisable  stock  options  with a  weighted  average
remaining  contractual life of 7.7 years and a range of exercise prices of $1.75
to $2.50.

                                      F-20
<PAGE>
                      AMTECH SYSTEMS, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


(12) STOCK BASED COMPENSATION - (CONTINUED)

        On October 14, 1998, the Company re-priced all stock options outstanding
as of September  30, 1998 to the closing  market price of $.56 per share on that
date.  Vesting  schedules and expiration dates remain  unchanged.  In accordance
with APB No. 25, "Accounting for Stock Issued to Employees",  the Company is not
required to record  compensation  expense related to this re-pricing and no such
expense has been recorded in these financial statements.

(13) KOREAN JOINT VENTURE:

        In the first  quarter of fiscal 1996,  the Company  entered into a joint
venture  agreement  pursuant  to which  the  Company  received  a 45%  ownership
interest and a 50% voting interest in Seil Semicon, Inc., (the "JVC"), in return
for a commitment  to invest  $500,000 in cash.  The joint  venturers  planned to
operate a silicon test wafer reclaiming  business in Korea through Seil Semicon,
Inc.,  which  remains in the start-up  phase.  Pursuant to that  agreement,  the
Company  invested  $425,000 and expensed  $65,000 of that amount as its share of
the start-up losses.  The joint venture succeeded in acquiring real property for
construction  of the  reclamation  facility  and in securing $3 million in third
party  financing.  However,  a review  during the fourth  quarter of fiscal 1996
revealed that the increases in the JVC's  anticipated  costs during the start-up
phase  and the cost of  additional  equipment  required  for the  operation  had
expanded the total  projected  capital  requirements  by $2,500,000.  During the
first quarter of fiscal 1997,  the  Company's  financial  relationship  with the
joint venture was  terminated  because  management  determined  that raising the
Company's  investment  commitment  to $3  million,  without  obtaining  majority
control,  was more  risk  than was  appropriate  for the  Company.  The  Company
received $478,000 during December 1996,  pursuant to the termination  agreement,
which reimbursed the Company's actual investment and expenses.

(14) DISCONTINUED TECHNICAL CONTRACT PERSONNEL SEGMENT:

        The Company entered the technical contract personnel segment in 1988. On
September 30, 1992, the Company sold  substantially all of the operations of the
technical  contract  personnel  segment,   with  only  Echelon  Service  Company
("Echelon")  being retained.  Echelon was acquired in 1989, using stock and cash
at closing as consideration, as well as an incentive arrangement payable in cash
and stock.  Since October 1995,  when the board of directors  approved a plan to
discontinue the technical  contract  personnel  business,  those operations have
been designated as discontinued in financial  reports of the Company.  Effective
December 29, 1995,  the Company  exchanged all of its ownership  interest in the
stock of Echelon for 196,034 shares of the Company's  outstanding $.01 par value
common stock previously owned by Eugene R. Hartman, then an officer and director
of the Company.  The  transaction was preceded by a dividend from Echelon to the
Company in order to equalize  values.  The  transaction  was  structured to be a
tax-free  reorganization  and, as such,  no provision  for income taxes has been
made relative to this transaction.

        The results of the discontinued operations reflected in the consolidated
statements of operations are those of Echelon  through the date of the disposal.
Revenue of the  discontinued  operations  were  $1,235,000  for the three months
ended December 1995. Income from discontinued  operations for fiscal 1996 is net
of  applicable  income  taxes of  $25,000.  The fiscal  1996  basic and  diluted
earnings from discontinued operations,  including the gain on disposition,  were
$.07 and $.06 per share, respectively.

                                      F-21
<PAGE>
                      AMTECH SYSTEMS, INC. AND SUBSIDIARIES

                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

              FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996


                      For the Year  Balance at  Charged
                         Ended      Beginning  (credited)            Balance at
                      September 30,  of Year   to Expense Write-offs End of Year
                      -------------  -------   ---------- ---------- -----------
1. Allowance for
   Doubtful Accounts:
                          1998       $130,000   $ 25,198    $ 12,198   $143,000

                          1997         90,000     42,960       2,960    130,000

                          1996         80,000     66,249      56,249     90,000
2. Deferred Tax
   Valuation Allowance:
                          1998       $ 61,000   $ 54,000    $     --   $115,000

                          1997         58,000      3,000          --     61,000

                          1996         78,000    (20,000)         --     58,000


                                      S-1
<PAGE>
                                    PART III

         Pursuant to Paragraph  G(3) of the General  Instructions  to Form 10-K,
portions of the information  required by Part III of Form 10-K are  incorporated
by reference from the Company's  Proxy Statement to be filed with the Commission
in  connection  with  the  1999  Annual  Meeting  of  Stockholders  (the  "Proxy
Statement").

ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         Information  concerning directors and executive officers of the Company
appears in the Company's Proxy Statement.

ITEM 10. EXECUTIVE COMPENSATION

         The  information  required by this Item is incorporated by reference to
the Company's Proxy Statement.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The  information  required by this Item is incorporated by reference to
the Company's Proxy Statement.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The  information  required by this Item is incorporated by reference to
the Company's Proxy Statement.

                                       30
<PAGE>
                                     PART IV

ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

     (a)  FINANCIAL STATEMENTS.

          The following is a list of all financial statements filed as a part of
          this Report:

          1.   Consolidated Balance Sheets - September 30, 1998 and 1997

          2.   Consolidated   Statements  of  Operations  for  the  years  ended
               September 30, 1998, 1997 and 1996

          3.   Consolidated  Statements  of  Stockholders'  Equity for the years
               ended September 30, 1998, 1997 and 1996

          4.   Consolidated  Statements  of  Cash  Flows  for  the  years  ended
               September 30, 1998, 1997 and 1996

          5.   Notes to Consolidated  Financial Statements - September 30, 1998,
               1997 and 1996

     (b)  FINANCIAL STATEMENT SCHEDULES

          The following is a list of a financial  statement schedule required to
          be filed as a part of this Report:

          1.   Schedule II - Valuation and Qualifying Accounts

         All schedules other than the Schedule listed above,  are omitted as the
         information is not required, is not material or is otherwise furnished.

                                       31
<PAGE>
     (c)  EXHIBITS.

                                                                      METHOD OF
    EXHIBIT NO.       DESCRIPTION                                      FILING
    -----------       -----------                                      ------
       3.1        Articles of Incorporation                              A
       3.2        Articles of Amendment to Articles of                   A
                  Incorporation, dated April 27, 1983
       3.3        Articles of Amendment to Articles of                   B
                  Incorporation, dated May 19, 1987
       3.4        Articles of Amendment to Articles of                   C
                  Incorporation, dated May 2, 1988
       3.5        Articles of Amendment to Articles of                   G
                  Incorporation, dated May 28, 1993
       3.6        Amended and Restated Bylaws                            D
       10.1       Amended and Restated 1995 Stock Option Plan            J
       10.2       1995 Stock Bonus Plan                                  J
       10.3       Non-Employee Director Stock Option Plan                K
       10.4       Employment Agreement with Robert T. Hass,              F
                  dated May 19, 1992
       10.5       Registration Rights Agreement with J.S. Whang,         G
                  dated January 24, 1994
       10.6       Employment Agreement with J.S. Whang, dated            M
                  February 28, 1997
       10.7       Contract of Sale (Real Property) dated June            I
                  21, 1996 between Tempress Systems, Inc. and
                  Orgelmakerij Gedr. Rell B.V.
       10.8       Research Agreement with The Regents of the             H
                  University of California dated March 1, 1994,
                  together with amendments thereto dated March
                  1, 1994, March 30, 1994, March 7, 1995, June
                  26, 1995, October 16, 1995, November 29, 1995,
                  and December 4, 1995
       10.9       Amendment to Research Agreement with the               I
                  Regents of the University of California dated
                  July 8, 1996
       10.10      Employment Agreement, dated July 1, 1997,              L
                  between the Registrant and John R. Krieger
       10.11      Registration Rights Agreement, dated July 1,           L
                  1997, between the Registrant and John R.
                  Krieger

                                 32
<PAGE>
                                                                      METHOD OF
    EXHIBIT NO.       DESCRIPTION                                      FILING
    -----------       -----------                                      ------
       10.12      Sublease Agreement, dated July 1, 1997,                L
                  between the Registrant and John R. Krieger
       10.13      Asset Purchase Agreement, dated July 1, 1997,          L
                  among the Registrant, P.R. Hoffman Machines
                  Corporation and John R. Krieger
       11         Scheudle of Computation of Net Income per              *
                  Share
       21         Subsidiaries of the Registrant                         *
       23         Consent of Independent Public Accountant               *
       24         Powers of Attorney                              See Signature
                                                                       Page
       27         Financial Data Schedule                                *
-------
*  Filed herewith.
A  Incorporated by reference to the Company's Form S-18  Registration  Statement
   No. 2-83934-LA.
B  Incorporated by reference to the Company's Annual Report on Form 10-K for the
   fiscal year ended September 30, 1987.
C  Incorporated by reference to the Company's Annual Report on Form 10-K for the
   fiscal year ended September 30, 1988.
D  Incorporated by reference to the Company's Annual Report on Form 10-K for the
   fiscal year ended September 30, 1991.
E  Incorporated by reference to the Company's Annual Report on Form 10-K for the
   fiscal year ended September 30, 1992.
F  Incorporated by reference to the Company's Annual Report on Form 10-K for the
   fiscal year ended September 30, 1993.
G  Incorporated  by reference to the Company's Form S-1  Registration  Statement
   No. 33-77368.
H  Incorporated by reference to the Company's Annual Report on Form 10-K for the
   fiscal year ended September 30, 1995.
I  Incorporated  by reference to the Company's Form S-3  Registration  Statement
   No. 333-09917.
J  Incorporated  by  reference  to  Company's  Form S-8  Registration  Statement
   relating  to the  Amended and  Restated  1995 Stock  Option Plan and the 1995
   Stock  Bonus  Plan filed  with the  Securities  and  Exchange  Commission  on
   September 9, 1997.
K  Incorporated  by  reference  to  Company's  Form S-8  Registration  Statement
   relating  to the  Non-Employee  Directors  Stock  Option  Plan filed with the
   Securities and Exchange Commission on August 8, 1996.
L  Incorporated by reference to the Company's  Current Report on Form 8-K, dated
   July 1, 1997.
M  Incorporated by reference to the Company's  Quarterly Report on Form 10-Q for
   the quarter ended June 30, 1997.

     (d)  Reports on Form 8-K

          There have not been any Form 8-K filed during this period.

                                       33
<PAGE>
                                   SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) 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.

                              AMTECH SYSTEMS, INC.

December 23, 1998                        By: /s/ John S. Whang
                                            ------------------------------------
                                            John S. Whang, President

                                POWER OF ATTORNEY

         KNOW  ALL MEN BY THESE  PRESENTS,  that  each  person  whose  signature
appears below  constitutes  and appoints  JONG S. WHANG and ROBERT T. HASS,  and
each of them, his true and lawful  attorneys-in-fact and agents, with full power
of substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities,  to sign any and all amendments to this Form 10-K Annual
Report, and to file the same, with all exhibits thereto,  and other documents in
connection therewith with the Securities and Exchange Commission,  granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing  requisite  and necessary to be done
in and about the premises,  as fully and to all intents and purposes as he might
or  could  do  in  person  hereby   ratifying  and   confirming  all  that  said
attorneys-in-fact and agents, or his substitute or substitutes,  may lawfully do
or cause to be done by virtue hereof.

         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this  report on Form 10-K has been  signed  below by the  following  persons  on
behalf of the registrant and in the capacities and on the dates indicated:

    SIGNATURE                     TITLE                             DATE
    ---------                     -----                             ----

/s/ Jong S. Whang
-----------------------  Chairman of the Board, President     December 23, 1998
Jong S. Whang            (Chief Executive Officer)


/s/ Robert T. Hass
-----------------------  Vice President-Finance               December 23, 1998
Robert T. Hass           (Chief Financial &
                          Accounting Officer)

/s/ Donald F. Johnston
-----------------------  Director                             December 23, 1998
Donald F. Johnston


/s/ Alvin Katz
-----------------------  Director                             December 23, 1998
Alvin Katz

/s/ Bruce R. Thaw
-----------------------  Director                             December 23, 1998
Bruce R. Thaw


                                       34