<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

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

       For the fiscal year ended SEPTEMBER 30, 1996 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: 0-25862

                               AG ASSOCIATES, INC.
             (Exact name of Registrant as specified in its charter)

                     CALIFORNIA                          94-2776181
           (State or other jurisdiction of            (I.R.S. Employer
           incorporation or organization)             Identification No.)

               4425 FORTRAN DRIVE, SAN JOSE, CALIFORNIA 95134-2300
              (Address of principal executive offices and zip code)

       Registrant's telephone number, including area code: (408) 935-2000

               Securities registered pursuant to Section 12(b) of
                 the Act: NONE Securities registered pursuant to
                            Section 12(g) of the Act:
                                  COMMON STOCK

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

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

The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based on the closing price of the Common Stock on December 2, 1996
as reported by the Nasdaq National Market ($6.25), was approximately
$18,702,219. Shares of Common Stock held by each officer and director and by
each person who owns 5% or more of the outstanding Common Stock have been
excluded from this computation in that such person may be deemed to be
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.

The Registrant had 5,945,264 shares of Common Stock outstanding as of December
2, 1996.

DOCUMENTS INCORPORATED BY REFERENCE

Part III of this Report on Form 10-K incorporates information by reference from
the Registrant's definitive Proxy Statement for its 1997 Annual Meeting of
Shareholders to be held on January 30, 1997 that is to be filed with the
Securities and Exchange Commission within 30 days after the date hereof.
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PART I

ITEM 1.  DESCRIPTION OF BUSINESS

THE COMPANY AND ITS PRODUCTS

    AG Associates, Inc. (the "Company") designs, manufactures, markets and
supports advanced single-wafer rapid thermal processing ("RTP") equipment used
in manufacturing integrated circuits and, based on both unit sales and revenue,
is the leader in the RTP market. The Company's products, marketed under the
Heatpulse(R) name, utilize high-intensity light to heat precisely a single
silicon wafer, causing a chemical process needed to produce an integrated
circuit.

    Historically, thermal processing has been performed in conventional batch
furnaces where 100 to 200 wafers are processed at one time. However, as
integrated circuit feature size has become smaller, semiconductor manufacturers
have encountered significant technical and practical constraints which have made
thermal processing in batch furnaces impractical, and in some cases impossible
with regard to certain steps in the integrated circuit manufacturing process.
These constraints include severe limitations on how long a wafer can be held at
high temperature, the need for an impurities-free thermal processing
environment, inefficiencies of batch processing in a predominantly single wafer
processing environment and the potential significant financial loss from
processing errors.

    The Company was the first to introduce products utilizing a new thermal
processing method, known as rapid thermal processing, to address many of the
limitations of traditional batch furnaces. The Company's RTP products have been
widely adopted for use by most of the manufacturers of technologically advanced
integrated circuits such as four megabit and larger dynamic memory chips, one
megabit and larger static memory chips and 486 class and higher-performance
microprocessors. The Company believes that, as integrated circuit feature size
decreases and processing power and performance increase, more process steps in
manufacturing integrated circuits will continue to be converted to RTP from
batch furnace processing and new process steps will be made possible by RTP.

TRADITIONAL THERMAL PROCESSING

    Integrated circuits are fabricated by repeating a complex series of chemical
and physical process steps on a silicon wafer. The principal steps in
manufacturing integrated circuits are heating the wafer to cause a chemical
reaction or structural change that modifies the electrical and physical
properties on the wafer surface (thermal processing), the deposition of
insulating or conducting materials on a wafer (deposition), the projection of a
pattern through a mask onto light sensitive materials known as photoresist
(photolithography) and the etching or removal of the deposited materials not
covered by the pattern (etching). Each of these steps is typically repeated many
times during the fabrication process.

    Historically, thermal processing has been performed in conventional batch
furnaces where loads of 100 to 200 wafers are processed at one time. However, as
feature size of integrated circuits has become smaller, semiconductor
manufacturers have encountered significant technical and practical constraints
which have made thermal processing in batch furnaces impractical, and in some
cases, impossible. These constraints include:

    - Limited thermal budget. Thermal budget is the total number of minutes that
      a wafer can be held at high temperature during the fabrication process. As
      integrated circuits have become more complex, their thermal budget has
      decreased dramatically. Certain furnace heating steps require exposure of
      between 30 and 90 minutes at high temperature, while the total thermal
      budget for certain more complex integrated circuits is on the order of
      five minutes.

    - Inability to achieve pure wafer environment. Large batch furnace chambers
      reduce the ability to eliminate contaminants, such as oxygen, that may be
      present in the chamber during the heating process. These contaminants
      produce defects in the processed wafer, reducing yield.

    - Inefficiencies of batch processing in a single wafer environment. Most
      integrated circuit fabrication equipment processes individual wafers in a
      cassette of 25 wafers at a time. Diffusion furnaces process wafers in
      batches of up to 200 (eight cassettes) at a time, resulting in bottlenecks
      and inefficiencies in the integrated circuit manufacturing process.

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    - Cost of processing failure. As the cost of a wafer has increased to
      several thousand dollars, manufacturers have focused increasingly on
      minimizing wafer loss in the fabrication cycle. Batch furnace processing
      creates a significant risk of loss in the case of misprocessing or
      equipment malfunction, since up to 200 wafers may need to be scrapped as a
      result of one error.

    These limitations, which became critical in the early 1990's, have driven
semiconductor manufacturers to search for alternative thermal processing
methods.

RAPID THERMAL PROCESSING -- THE AG ASSOCIATES SOLUTION

    The Company was the first to introduce a product utilizing a new thermal
processing method, known as rapid thermal processing, which addresses many of
the limitations of traditional batch furnaces. Since its introduction, RTP has
become integrated into the production of many advanced integrated circuits. The
Company's RTP products have been widely adopted for use by many of the
manufacturers of technologically advanced integrated circuits such as four
megabit and larger dynamic memory chips, one megabit and larger static memory
chips and 486 class and higher-performance microprocessors.

    RTP involves radiating a single wafer with high intensity light in a precise
manner. During RTP processing, individual wafers are rapidly heated from room
temperature to steady state temperatures between 400 degrees centigrade and 1200
degrees centigrade, held there for a short time and then rapidly cooled.
Typically, the entire heating and cooling process takes between 30 to 100
seconds per wafer. The Company's RTP systems have enabled its customers to
overcome the limitations of traditional thermal processing and to process
today's complex devices by:

    - Meeting thermal budget limitations. RTP permits the thermal processing of
      advanced integrated circuits to be completed within their limited thermal
      budgets. By heating and cooling a wafer more rapidly than a furnace, RTP
      permits processing at higher temperatures for a shorter duration than a
      furnace. This reduces thermal budget demands and improves performance
      characteristics at approximately the same cost of ownership.

    - Providing superior contamination control. The small size and ambient purge
      capabilities of RTP processing chambers permit the removal of unwanted
      gases from the wafer processing environment, thereby reducing the
      possibility of contamination. For the past five years, RTP has been used
      extensively to heat wafers with metal layers that are sensitive to
      residual oxygen. Such precise contamination control is impractical in a
      batch furnace.

    - Improving wafer process flow. RTP's single wafer technology is well
      matched to the single wafer cassette processes used in modern wafer
      fabrication facilities. Since most other integrated circuit process steps
      are single wafer processes, RTP streamlines the process flow of wafers,
      avoiding bottlenecks in production, and enables users to reduce
      work-in-process.

    - Reducing cost of processing errors. RTP's single wafer processing
      technology has dramatically reduced the cost of processing errors. In the
      event of a malfunction, self-tests and interlock mechanisms shut down the
      processing equipment, generally limiting loss to one or two wafers. The
      reduced wafer loss also enables cost-efficient testing of new
      technologies.

    RTP has been widely adopted for use by most manufacturers of integrated
circuits and is a necessary ingredient in the production of certain integrated
circuits. The Company believes that with the production of 486 microprocessors,
most static memory chips larger than one megabit and most dynamic memory chips
greater than four megabit utilize at least one RTP step. More powerful
integrated circuits such as advanced microprocessors and very large memories
often require multiple RTP steps in the manufacturing process.

PRODUCTS

    AG Associates' products, marketed under the Heatpulse name, use a processing
chamber which includes two arrays of linear lamps that supply the heating energy
to the wafer, advanced temperature measurement and control subsystems and an
ultra clean gas delivery system. The wafer is positioned inside a quartz tube,
which ensures the purity of the chamber atmosphere during the heating process.
The wafer is then heated between the two banks of lamps. The heating cycle
typically includes a short purge step to drive contaminants out of the quartz
tube, a ramp-up to the processing temperature, a steady


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state step at the processing temperature of between 10 to 60 seconds and a
cool-down period prior to removing the wafer from the processing chamber.

    The Company's products also incorporate an automated wafer-handling robotic
subsystem and software for advanced system and process control and host
communication that, except for the operating system and certain module
components, are designed, developed and tested by the Company. The Company
believes, based upon comments by its customers, that its Heatpulse products are
reliable and compare favorably with other products in the market.

     Heatpulse 8800. The Company's Heatpulse 8800 Rapid Thermal Processing
system is the most recent model of the Company's production systems and was
introduced to the market at Semicon West in July 1996. This system is based on
the Company's previous model, the Heatpulse 8108, with significant cost and
performance improvements. This model incorporates an individual lamp power
supply which is controlled by sophisticated closed-loop AG lamp power modules
that provide fine control of wafer temperature uniformity. An additional feature
is a high throughput purge system that allows a 30% savings of the heating
cycle, therefore increasing throughput and reducing cost per wafer. The
Heatpulse 8800 system is targeted for R&D and production of devices utilizing
 .25 micron technology. The initial first three beta systems were shipped during
the fourth quarter of fiscal 1996 with a price range of $550,000 to $750,000
depending upon options and configuration.

    Heatpulse 8108. The Company's Heatpulse 8108 rapid thermal processing system
was first shipped in October 1992. The machine has been the Company's flagship
product targeted for volume production processes that utilize wafer sizes from
125 to 200 millimeters (5 to 8 inches) for feature sizes as small as 0.35
micron, but the Company expects that sales of the Heatpulse 8108 will decline in
favor of the Heatpulse 8800 as customer technology requirements increase. This
system is designed to accommodate periodic upgrades to meet evolving customer
needs. Heatpulse 8108 incorporates a number of unique features that offer
semiconductor manufacturers improved thermal processing capability, reliability
and performance. These features include patented adjustable lamp heating zones
to provide process and temperature uniformity, a patented temperature
measurement method to ensure process accuracy and repeatability, as well as a
proprietary automation package for equipment-to-host communication. These and
other product features of the Heatpulse 8108 typically enable the device
manufacturer to improve throughput, uniformity and repeatability and to reduce
wafer particle contamination. Current end-user selling prices for Heatpulse 8108
systems typically range from $500,000 to $700,000, depending upon configuration
and options.

    Heatpulse 4100 Series. The Heatpulse 4100S, first shipped in April 1994, is
the successor to the Heatpulse 4100 and was the first through-the-wall,
environmentally isolated automatic RTP system for the manufacture of 100 to 150
millimeter (4 to 6 inches) wafers. The Heatpulse 4100S is used in the processing
of wafers with sizes up to 150 millimeters and with feature sizes as small as
0.6 micron. The Heatpulse 4100S improves on both the reliability and performance
of the Heatpulse 4100. Current end-user selling prices for Heatpulse 4100 Series
systems typically range from $350,000 to $450,000, depending upon configuration
and options. Although this product currently accounts for a small percentage of
the Company's net sales, many of the units shipped are still in use throughout
the world.

    Heatpulse 610. The Heatpulse 610, the successor to the Company's first
table-top manual system, is the Company's current RTP tool targeted for research
and development and small-scale production applications. The Heatpulse 610 is
suitable for processing wafers of up to 150 millimeters (6 inches). Current
end-user selling prices for Heatpulse 610 systems typically range from $60,000
to $65,000, depending upon configuration and options. Although this product
currently accounts for a small percentage of the Company's net sales, many of
the units shipped are still in use throughout the world.

     Upgrades. During its fourth fiscal quarter, the Company introduced a number
of performance upgrades to all of its 200mm production systems. Among those are
a high performance ceramic shield which improves systems' repeatability and
reduces their sensitivity to the type of wafers that are being processed. Other
upgrades include a throughput package and an individual lamp control package
that could allow a user to achieve Heatpulse 8800 performance on earlier models.

RTP TECHNOLOGY

    During the fabrication process, wafers undergo between 100 to 200 principal
steps, nine to fifteen of which are thermal process steps. The following two
examples are only a subset of a number of processes in which RTP provides
significant technical and economic advantages to its users. The processes
described below were among the first processes in which RTP gained widespread
acceptance as an industry standard.

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    A significant portion of all current RTP applications involve titanium
silicide, an important step in manufacturing integrated circuits with reduced
feature size and the step that first led to widespread acceptance of RTP in the
wafer fabrication process. In integrated circuit manufacturing a thin titanium
layer is used to assure adequate conductivity between the silicon material and
the overlaying metal conductor. To create a good contact between the titanium
and the silicon it must be heated to approximately 650(Degree)C in an inert gas
(creating a thin conductive alloy called titanium silicide). Since titanium is
very sensitive to even minute traces of oxygen, it is impossible to perform this
operation in a conventional large batch furnace. RTP allows quick heating of
individual wafers in a small quartz chamber that ensures an extremely low level
of residual oxygen. The Company believes that titanium silicide processes will
become increasingly important since titanium silicide permits extremely small
contact areas while maintaining low contact resistance.

    Another critical thermal process which is limited by conventional furnaces
is the activation of foreign dopants introduced into the wafer to build the
transistor (the switching element in the circuit). The high temperatures, 950 to
1050(Degree)C, necessary to activate the dopants and complete the creation of
the transistor, when achieved in a furnace, cause the dopants to propagate
(diffuse) into the material, adversely affecting transistor speed. The use of a
very short and precise high temperature RTP step, 1100(Degree)C for 10 seconds,
allows the needed activation but prevents diffusion of the dopants, resulting in
a significantly faster transistor.

RESEARCH AND DEVELOPMENT

    Rapid Thermal Processing. The market served by the Company is characterized
by rapid technological change. The Company believes that continued and timely
development of new products and enhancements to existing products are necessary
for it to maintain its competitive position. Accordingly, the Company devotes a
significant portion of its resources to sustaining and upgrading the Company's
existing products to improve serviceability or add new capabilities and
features, to decreasing the cost of owning and operating such products, to
developing new products with improved capabilities and to maintaining close
relationships with its customers in order to identify their product needs. From
time to time, the Company enters into joint development efforts with other
organizations. For example, the Company has previously engaged in a joint
development effort with the Massachusetts Institute of Technology and Sematech,
Inc., an industry consortium, on chamber modeling and optimization.

    Product Development. In August 1995, the Company undertook a major
development program to design and manufacture a .18 micron rapid thermal
processing system. This system was intended to provide the Company with a next
generation product. To properly execute this plan, the Company increased its R&D
and engineering personnel dedicated and focused on this program. Currently, the
Company has approximately 45 professionals working in the following disciplines:
hardware, mechanical, computer, control algorithm, software and simulation. This
program is headed by the Company's Vice President Product Development and is
expected to last approximately two years.

    Integrated Processing. In 1992, the Company became involved in the
development of integrated chemical vapor deposition ("CVD") processing systems
through its acquisition of Rapro Technology, Inc. ("Rapro"), a research and
development stage company. Integrated processing involves the use of more than
one process chamber that permits wafers to undergo two or more sequential
process steps without removing the wafer from a clean vacuum environment. In May
1995, the Company's CVD cluster tool development activities were transferred to
AG Associates (Israel) Ltd. ("AG Israel"), the Company's 49%-owned subsidiary.

    There can be no assurance that the Company's research and development
efforts will be successful or that any new products will achieve significant
market acceptance.

    During fiscal years ended September 30, 1996, 1995 and 1994, the Company
expended $16,653,000, $8,893,000 and $6,078,000, respectively, on research and
development, representing approximately 23%, 14% and 15% of revenues for such
periods. See Part II, Item 7 "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

SALES, SERVICE AND MARKETING

    The Company believes that close working relationships with leading
integrated circuit manufacturers help to ensure that the Company's products are
technically advanced and designed in conjunction with the development of the
semiconductor manufacturers' advanced process requirements. These relationships
typically involve exchange of material and information to


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develop processes and equipment needed to manufacture state of the art
integrated circuits or to lower the semiconductor manufacturer's cost of
ownership. The Company's close working relationships with customers involve
working with the customer in a continuous improvement process on selected
technical aspects of the Company's products. For example, customer-requested
projects have included (a) improving long-term stability of temperature
measurement gauges and (b) identifying requirements for, and executing, a remote
control software package to allow a specific customer to control the Company's
equipment from a remote centralized computer. Such improvements, after testing
with selected customers, often become standard on all the Company's products
sold worldwide. Financial support for these development programs is generally
not provided by the customer.

    The Company's sales cycle is between three and nine months. The shorter
cycles relate to existing customers who desire to increase gradually the
capacity of their existing fabrication lines. The longer cycles are related to
customers who have long-term plans for constructing new production facilities
planned at least a year in advance. Historically, the Company has worked with
potential customers for long periods of time prior to their acceptance of the
Company's products, in some cases as long as five years. Since RTP has gained
increased acceptance, this period of time has decreased. Nonetheless, customers
generally purchase evaluation units prior to making substantive commitments to
purchase the Company's product. Acceptance periods vary widely from customer to
customer.

    Warranty periods vary from customer to customer, but generally average 15
months. A limited number of training classes is included in the purchase price
of the Company's products. Subsequent training is provided for a nominal fee.

    The Company markets its products both directly, through in-house sales
personnel in conjunction with independent sales representatives, or indirectly
through independent distributors. To promote its products, the Company uses
demonstration laboratories in its San Jose, California facility and maintains an
adequate amount of parts inventory. The Company and its sales representatives
and distributors have sales and support centers located in the United States,
Japan, Korea, Taiwan, Singapore, Europe and Israel. When a higher level of
technical expertise is needed, the sales effort is supported by product
marketing managers and process engineers who work closely with customers,
potential customers and groups of customers to find solutions to their current
and future processing challenges. The Company has established relationships with
key international distributors, including among others, Canon Sales Co., Inc.
("Canon") and MSE Metron Semiconductors Europa, B.V. and MSA Metron
Semiconductors Asia Ltd. (collectively, "Metron"). Canon has represented the
Company in Japan since 1985, and Metron has represented the Company in Europe
and Korea since 1989 and 1994, respectively. Canon is a principal shareholder of
the Company and provides a representative on the Company's Board of Directors.

    The Company's distributors and independent representatives provide essential
pre- and post-sale support for the Company's products in their territories and
account for a substantial percentage of the Company's sales worldwide. The
Company believes that strong sales in the major semiconductor manufacturing
markets internationally are important to its future success. All of the
Company's sales in Japan are through Canon and those in Europe and Korea are
through Metron. Metron and Canon both sell the Company's products under their
own warranties and provide service and support to their customers. Canon also
customizes systems purchased from the Company for redelivery to Canon's
customers' specifications. Net sales to Canon amounted to 25%, 15% and 13% of
the Company's net sales for the years ended September 30, 1996, 1995 and 1994,
respectively. Net sales to Metron amounted to 14% and 15% for the years ended
September 30, 1996 and 1994, respectively. Net sales to Metron for the year
ended September 30, 1995 accounted for less than 10% of the Company's net sales.

    International sales represented 54%, 32% and 48% of the Company's net sales
for the years ended September 30, 1996, 1995 and 1994, respectively. Because of
the magnitude of its international sales, the Company is subject to the normal
risks of conducting business internationally. The Company is also subject to
general geopolitical risks in connection with its international operations.
Because sales of the Company's products are denominated in United States
dollars, fluctuations in the value of the dollar could increase or decrease the
prices in local currencies of the Company's products in foreign markets and make
the Company's products relatively more or less expensive than competitors'
products that are denominated in local currencies. See Note 12 of Notes to
Consolidated Financial Statements.

    Other than its distributor agreements, the Company currently has no
long-term contracts with any of its customers and sales are generally made
pursuant to purchase orders. None of the Company's distributors or independent
sales representatives has the power to enter into contracts on the Company's
behalf or otherwise bind the Company.

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CUSTOMERS

    The Company's end-user customers include most of the leading semiconductor
manufacturers worldwide. For the year ended September 30, 1996, Intel
Corporation accounted for 20% of total net sales and NEC accounted for 17% of
total net sales. For the year ended September 30, 1995, Intel Corporation
accounted for 29% of total net sales. Sales to International Business Machines
accounted for 12% of total net sales for the year ended September 30, 1995. No
other end-user customer accounted for more than 10% of the total net sales for
fiscal years ended September 30, 1996, 1995 and 1994.

    The Company's business depends upon the capital expenditures of
semiconductor manufacturers, which in turn depend on the current and anticipated
market demand for integrated circuits and products utilizing integrated
circuits. No assurance can be given that the Company's revenue and operating
results will not continue to be adversely affected if downturns in the
semiconductor industry continue to occur.

BACKLOG

    The Company's systems backlog (consisting of product scheduled for delivery
within the next six months) as of September 30, 1996 and September 30, 1995 was
approximately $8.4 million and $29.6 million, respectively. The Company includes
in its backlog customer purchase orders that have been accepted and to which
shipment dates have been assigned within the next six months. All orders are
subject to cancellation or delay with limited or no penalty. Because of possible
changes in delivery schedules and cancellations of orders, the Company's backlog
at any particular date is not necessarily indicative of actual sales for any
succeeding period.

COMPETITION

    The semiconductor equipment industry, including the Company's segment of the
market, is intensely competitive and is characterized by rapid technological
change, product obsolescence and heightened competition in many markets. The
Company competes with several major domestic and international semiconductor
equipment companies, most of which have substantially greater financial,
technical, marketing, distribution and other resources than the Company, as well
as broader product lines. Additionally, the Company competes with several small
semiconductor equipment companies.

    The Company's principal RTP competitors compete based upon both price and
performance, having incorporated features similar to those offered by the
Company into their RTP products, as well as features such as cluster tool
performance, which the Company does not offer. The Company competes by providing
complete process solutions to customers, including training for customer
personnel, helping identify and resolve process problems on a continuous basis
and emphasizing customer service and product quality and reliability. Some
competitors attempt to gain market share primarily through pricing products with
features similar to the Company's products at prices below those typically
offered by the Company. Such competitive pricing pressure has in certain cases
necessitated and may continue to necessitate significant price reductions by the
Company and has and may continue to result in lost orders which could adversely
affect the Company's business. For example, the Company has experienced
intensifying price competition from AST Elektronik, a German-based competitor,
which has resulted in a loss of some market share for the Company, predominantly
in Europe. In addition, many companies, particularly certain Japanese and United
States companies, have the financial and technical resources to participate in
these markets and have broader product lines. For example, Applied Materials,
Inc., a large manufacturer of semiconductor manufacturing equipment located in
the United States, has entered the RTP segment of the thermal processing market
in which the Company competes and has reported sales of an RTP cluster tool for
throughput enhancement to certain of the Company's existing customers. During
the second quarter of fiscal 1996, the Company announced that one of its major
customers had chosen an Applied Materials system to perform 75% of its RTP
steps. The Company was notified that it will continue to receive the remaining
25% of this customer's business for the .25 micron technology. At the time that
this competition took place, the Heatpulse 8800 was not yet available for
evaluation. Other manufacturers have also announced their intention to enter the
RTP market. Some integrated circuit manufacturers may attempt to consolidate all
their capital equipment purchases through a single or a small number of vendors.
There can be no assurance that companies with broader product lines and greater
resources, including Applied Materials, Inc., will not become more formidable
competitors in the future.

    The Company also competes with manufacturers of batch diffusion furnaces for
application of their differing technologies in various steps of the integrated
circuit fabrication process. The Company believes that its ability to compete
depends upon its continued success in developing new product features. Moreover,
the ability to achieve process uniformity


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and repeatability, improve breadth of process capability and flexibility, reduce
the overall cost of ownership and protect the Company's proprietary technology
play an important role in the Company's ability to compete.

MANUFACTURING

    Production is based upon firm customer commitments and anticipated orders
and is generally planned six months in advance. The Company's manufacturing
operations consist primarily of assembly, integration and final testing of parts
and subassemblies supplied by third-party suppliers, all of which are conducted
at the Company's manufacturing facility. Once the manufacturing department has
completed final testing of all electronic and electromechanical subassemblies
which make up one of the Company's products, the completed system is tested by
the Company's test engineers. To test each product, the Company's engineers
process wafers in the system to ensure that each system meets the customer's
process specifications. To increase the efficiency of the Company's
manufacturing process, the Company selectively utilizes outside contractors to
assemble subassemblies and components. The use of subcontractors enables the
Company to focus on its design strengths, minimize fixed costs and capital
expenditures and access diverse manufacturing technologies without bearing the
full risk of obsolescence. This has allowed the Company to increase production
rates while avoiding investment in additional facilities and minimizing
inventory growth.

    Certain components and subassemblies included in the Company's products are
obtained from a single source or a limited group of suppliers and subcontractors
in order to assure overall quality and timeliness of delivery. The Company's
reliance on sole or a limited group of suppliers involves several risks,
including a potential inability to obtain adequate supplies of certain
components and reduced control over pricing and timely delivery of components.
Although the timeliness, quality and pricing of deliveries to date from the
Company's suppliers have been acceptable and the Company believes that
additional sources of supply will be available should one or more of its
suppliers be unable to meet the Company's needs, there can be no assurance that
supplies will be available on an acceptable basis. Inability to obtain adequate
supplies of components or to manufacture such components internally could delay
the Company's ability to ship its products, which could result in the loss of
customers who may seek alternative sources of supply.

PATENTS AND OTHER PROPRIETARY RIGHTS

    The Company relies on a combination of patent, copyright, trademark and
trade secret laws, non-disclosure agreements and other intellectual property
protection methods to protect its proprietary technology. The Company believes
that the duration of its patents generally exceeds the life cycles of the
technologies disclosed and claimed therein. Though the Company has additional
patent applications pending in various foreign countries, there can be no
assurance that any patents will result from these applications. In addition, the
Company has registered the name "Heatpulse" with the U.S. Patent and Trademark
Office, restricts access to its technology and enters into confidentiality
agreements with its employees and consultants. Finally, the Company relies on
copyright protection for the software imbedded in its Heatpulse systems.
However, the Company has not registered any portion of the software with any
domestic or foreign copyright office.

    There can be no assurance that the Company's patents or other means of
intellectual property protection, including the Company's confidentiality
agreements and applicable trade secret laws, will provide adequate protection
for the Company's intellectual property rights. Further, it is possible that
others will develop, copyright or patent similar technology or reverse engineer
the Company's products. In addition, the laws of certain territories in which
the Company's products are or may be developed, manufactured or sold, including
Asia, Europe or Latin America, may not protect the Company's products and
intellectual property rights to the same extent as the laws of the United
States. While the Company intends to continue to seek patent, copyright,
trademark and trade secret protection for its products and manufacturing
technology where appropriate, the Company believes that its success depends more
on the technical expertise and innovative abilities of its personnel, rather
than the protections that these laws can provide.

    The Company is not currently involved in any intellectual property
litigation. However, there can be no assurance that third parties will not
assert claims against the Company with respect to existing or future products or
technologies or that, in case of a dispute, licenses will be available on
commercially reasonable terms, or at all, with respect to disputed third-party
technology. See Item 3 "Legal Proceedings."

    The Company has licensed to Canon certain of the Company's proprietary
technology to design and manufacture modifications to its products for resale in
Japan. In addition, the Company has transferred joint ownership of the CVD


                                       8
<PAGE>   9
cluster tool technology to AG Israel, together with a license of the Company's
RTP temperature measurement technology. See Part III, Item 13 "Certain
Relationships and Related Transactions."

EMPLOYEES

    As of September 30, 1996, the Company had 222 full-time employees, including
73 in engineering, research and development, 51 in manufacturing, 58 in service,
23 in marketing and sales and 17 in administration. None of the Company's
employees is subject to a collective bargaining agreement, and the Company has
never experienced a work stoppage. The Company believes that its relations with
its employees are good.

    Many of the Company's employees are highly skilled, and the Company believes
its future success will depend in part upon its ability to identify, attract and
retain such employees, particularly highly skilled design engineers involved in
new product development, for whom competition is intense. In addition, the
Company is highly dependent on the skill and experience of its Chairman of the
Board, Arnon Gat.

                                       9
<PAGE>   10
ITEM 2.  PROPERTIES

    In October 1995, the Company moved its headquarters from Sunnyvale,
California to a new facility in San Jose, California. The leased San Jose
facility houses the Company's management, administrative, manufacturing,
engineering, marketing, sales and customer support personnel in two buildings in
approximately 115,000 square feet. An option to expand the San Jose facilities
by approximately 38,000 square feet is available to the Company within three
years. The Company also leases approximately 1,500 square feet of office space
for its customer support personnel in Austin, Texas.

    In addition, the Company leases approximately 2,800 square feet of office
space for its sales and customer support personnel in Hsin-Chu, Taiwan, Republic
of China.

    The Company believes that its existing facilities are suitable and adequate
to meet the Company's current requirements. The Company will continue to
consider leasing additional facilities as necessary to support its expanding
operations in the future.


ITEM 3.  LEGAL PROCEEDINGS

    The Company is not currently involved in any intellectual property
litigation. However, there has been substantial litigation regarding patent and
other intellectual property rights in the semiconductor industry. General Signal
Corporation has made a claim against at least two manufacturers of cluster tools
that have resulted in litigation to the effect that certain of their cluster
tool technologies infringe on General Signal patents. In 1991, at the time that
General Signal first raised patent claims in the cluster tool area, the Company
joined with six major semiconductor process tool equipment manufacturers in
forming an "Ad Hoc Committee for Defense against General Signal Cluster Tool
Patents" (the "Ad Hoc Committee"). Based in part on an opinion of patent
counsel, the members of the Ad Hoc Committee notified General Signal that the
member companies were of the opinion that the General Signal patents were
invalid based on (a) prior art, (b) inequitable conduct before the Patent &
Trademark Office and (c) estoppel as a result of General Signal's activities in
establishing standards for cluster tools and interfaces within the semiconductor
industry. The Company believes that the position taken by the Ad Hoc Committee
remains valid. Previously, the Company approached General Signal to explore
interest in licensing the same patents at issue in the General Signal
litigation. The general conditions of the license discussed by General Signal
were unacceptable to the Company. Based upon a review of the subject patents,
the Company believes that the subject patents are invalid or, if somehow found
to be valid, that the Company's cluster tool technology does not infringe.
Additionally, the Company has received an opinion of its patent counsel, to the
same effect. However, if such a claim were successfully enforced against the
Company regarding the cluster tool technology transferred to AG Israel, the
value of the Company's investment in AG Israel could diminish. The Company could
also be adversely affected as a result of the Company's liability under an
indemnity provision with AG Israel and Clal Electronics Industries, Ltd. for any
resulting royalties and other damages payable.

    From time to time, the Company may receive or initiate claims or inquiries
against third parties for infringement of the Company's proprietary rights or to
establish the validity of the Company's proprietary rights. Such claims or
inquiries may result in litigation and could result in significant expense to
the Company and divert the efforts of the Company's technical and management
personnel from other tasks, whether or not such claims or inquiries are
determined in favor of the Company. In the event of an adverse ruling in any
such litigation, the Company might be required to pay substantial damages, cease
the manufacture, use and sale of infringing products, discontinue the use of
certain processes or expend significant resources to develop non-infringing
technology or obtain licenses to the infringing technology.


ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS

         Not applicable.

                                       10
<PAGE>   11
PART II

ITEM 5.  MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
         MATTERS

COMMON STOCK TRADING RANGE

    The Company's Common Stock has been traded on the Nasdag National Market
under the symbol AGAI since the company's initial public offering on May 16,
1995. The following table sets forth for the Company's Common Stock the range of
high and low closing prices on the Nasdaq National Market.

                                    High          Low
                                    ----          ---
Fiscal 1995

3rd Quarter                         $17.75        $13.00
4th Quarter                          36.81         17.00

Fiscal 1996

1st Quarter                         $31.00        $13.25
2nd Quarter                          15.00          6.38
3rd Quarter                           9.00          6.50
4th Quarter                           7.25          4.75

         The closing price of the Company's Common Stock on December 2, 1996, as
reported by the Nasdaq National Market, was $6.25.

COMMON SHAREHOLDERS OF RECORD

         At October 31, 1996, there were approximately 188 shareholders of
record of the Company's Common Stock, as shown in the records of the Company's
transfer agent, excluding shareholders whose stock is held in nominee or street
name by brokers. The Company has never paid dividends on its Common Stock and
its present policy is to retain earnings to finance anticipated future growth.

                                       11
<PAGE>   12
ITEM 6.  SELECTED FINANCIAL DATA

SELECTED CONSOLIDATED FINANCIAL DATA


<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
                                                                              Years Ended September 30,
                                                  ---------------------------------------------------------------------------------
(in thousands, except per share data)                   1996              1995            1994             1993            1992
                                                  ------------------  --------------  --------------   --------------  ------------
<S>                                                   <C>                <C>             <C>              <C>             <C>
Consolidated Statement of Income Data:
         Net sales                                    $71,089            $62,725         $40,251          $27,792         $23,883
         Gross profit                                 $31,725            $29,028         $17,578           $7,074          $9,698
         Research and development                     $16,653             $8,893          $6,078           $7,665          $6,138
         Selling, general and administrative          $10,204            $10,562          $7,035           $5,894          $6,243
         Restructuring charges                              -                  -               -           $2,645          $4,102
         Income (loss) from operations                 $4,867             $9,573          $4,465          ($9,130)        ($6,785)
         Income (loss) before income taxes             $4,487             $9,221          $3,361          ($9,467)        ($6,961)
         Net income (loss)                             $2,743             $9,753          $3,224          ($9,496)        ($7,216)
         Net income (loss) per share                    $0.45              $2.05           $0.87           ($2.52)         ($1.93)
         Shares used in per share calculation           6,137              4,770           3,772            3,755           3,746
</TABLE>


<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
                                                                              Years Ended September 30,
                                                  ---------------------------------------------------------------------------------
(in thousands)                                          1996              1995            1994             1993            1992
                                                  ------------------  --------------  --------------   --------------  ------------
<S>                                                   <C>                <C>             <C>              <C>             <C>
Consolidated Balance Sheet Data:
         Cash and cash equivalents                     $11,985           $18,858          $1,598             $899            $157
         Working capital (deficiency)                  $26,851           $28,649         ($1,257)         ($4,817)           $756
         Total assets                                  $45,852           $48,825         $14,676          $14,142         $14,749
         Long-term obligations                             $11              $193            $691             $422          $1,220
         Convertible subordinated debentures                 -                 -          $2,107           $2,045               -
         Minority interest in subsidiary                     -                 -          $1,979           $1,979               -
         Shareholders' equity (deficiency)             $35,694           $32,300         ($3,740)         ($7,445)         $1,994
</TABLE>



<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
                                                                                              Quarter Ended
                                                                      -------------------------------------------------------------
(in thousands, except per share data)                                    Sep 30          June 30         March 31         Dec. 31
                                                                      --------------  --------------   --------------  ------------
<S>                                                                   <C>               <C>             <C>              <C>
Consolidated Statement of Income Data: (unaudited)
1996
         Net sales                                                       $8,833          $17,196          $23,200         $21,860
         Gross profit                                                     2,805            7,235           11,229          10,455
         Income (loss) from operations                                   (3,562)             374            3,870           4,185
         Income (loss) before income taxes                               (3,394)              66            3,775           4,040
         Net income (loss)                                               (1,907)              39            2,227           2,384
         Net income (loss) per share                                     ($0.32)           $0.01            $0.37           $0.38

1995
         Net sales                                                       $19,731         $16,780          $13,937         $12,277
         Gross profit                                                      9,349           7,953            6,301           5,425
         Income from operations                                            3,490           2,445            2,036           1,602
         Income before income taxes                                        3,398           2,444            1,858           1,521
         Net income                                                        2,876           3,669            1,761           1,447
         Net income per share                                              $0.46           $0.75            $0.47           $0.38
</TABLE>

                                       12
<PAGE>   13
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
          OF OPERATIONS

Management's Discussion and Analysis of Financial Condition and Results of
Operations

The Company's common stock price may be subject to significant volatility. For
any given period, a shortfall in the Company's announced revenue or earnings
from the levels expected by securities analysts could have an immediate and
adverse effect on the trading price of the Company's common stock. The Company
may not learn of, nor be able to confirm, revenue or earnings shortfalls until
late in the period or following the end of the period. In general, the Company
participates in a very dynamic high technology industry, which can result in
significant fluctuations in the Company's Common Stock price at any time.

Except for the historical information contained herein and in the Annual Report
of which this Form 10-K is a part, the matters discussed in this Management's
Discussion and Analysis of Financial Condition and Results of Operations, the
Form 10-K and the Annual Report are forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and
Section 27A of the Securities Act of 1933, as amended, that involve risks and
uncertainties, including the rate of orders for the Company's products, the
timely availability and acceptance of new products, the impact of competitive
products and pricing, the management of growth, the impact of the Company's
efforts to implement its evolving long-term strategy and the other risks
detailed below and from time to time in the Company's other reports filed with
the Securities and Exchange Commission. The actual results that the Company
achieves may differ materially from any forward-looking projections due to such
risks and uncertainties. The Company has identified with a preceding asterisk
("*") various sentences within this Management's Discussion and Analysis of
Financial Condition and Results of Operations which contain such forward-looking
statements, and words such as "believes," " anticipates," "expects," "future,"
"intends" and similar expressions are intended to identify forward-looking
statements but are not the exclusive means of identifying such statements. In
addition, the section labeled "Factors That May Affect Future Results" and
portions of the Annual Report, which all have no asterisks for improved
readability, consist primarily of forward-looking statements. The Company
undertakes no obligation to publicly release the results of any revisions to
these forward-looking statements that may be made to reflect events or
circumstances after the date hereof.

FACTORS THAT MAY AFFECT FUTURE RESULTS

The Company's operating results are subject to quarterly and other fluctuations
due to a variety of factors, including the volume and timing of orders received,
potential cancellation or rescheduling of orders, competitive pricing pressures,
availability and cost of component parts and materials from the Company's
suppliers, the adequate forecasting of the mix of product demand due to
production lead times and capacity constraints, the timing of new product
announcements and introductions by the Company or its competitors, changes in
the mix of products sold, research and development expense associated with new
product introductions, the timing and level of development costs, market
acceptance of new or enhanced versions of the Company's products, seasonal
customer demand, the cyclical nature of the semiconductor industry and economic
conditions generally or in various geographic areas. The Company's ability to
compete also depends upon the Company's ability to develop new product features
that enhance uniformity and repeatability, improve process capability and
flexibility and reduce cost of ownership. In addition, because of the relatively
high selling prices of the Company's products, a significant portion of the
Company's net sales in any given period is often derived from the sale of a
relatively small number of units, and a change, even though minor, in the number
of units sold during a quarter can result in a large fluctuation in net sales
for that quarter.

In recent quarters, the Company has experienced declining net sales and has
begun to incur net losses on a quarterly basis as a result of the effects of the
semiconductor industry's slowing order rate, continuation of a high level of
research and development spending on the Company's next generation products and
competitive pressures. The Company's ability to reduce the trend of declining
net sales, which have started to yield net losses, is dependent on several
factors including increased order rates for the Company's products, successful
and timely development and market acceptance of the Company's next generation
products and successful competition with the Company's competitors on a price
and performance basis. Many of these factors are not within the Company's
control, and if order rates for the Company's products fail to increase, if the
Company's next generation products are not successfully and timely developed and
accepted by the Company's customers, or if the Company cannot successfully
compete with its competitors, many of whom have substantially greater resources
than the Company, the Company's net sales will continue to decline and the
Company would


                                       13
<PAGE>   14
experience further net losses, which would have a material adverse effect on the
Company's financial condition and results of operations. *In particular, the
Company expects net sales for the fiscal year ending September 30, 1997 to be
lower than the net sales achieved during fiscal 1996 due to the semiconductor
industry's slowing order rate and competitive pressures.

RESULTS OF OPERATIONS

The following table sets forth items in the Company's Consolidated Statement of
Income as a percentage of net sales for the periods indicated.

<TABLE>
<CAPTION>
                                                                   Years Ended September 30,
                                                                   -------------------------
                                                             1996(tau)       1995          1994
                                                             ---------       ----          ----

<S>                                                          <C>           <C>           <C>
Net sales                                                       100%          100%          100%
Cost of sales                                                   55            54            56
                                                             ----------    ----------    ----------
   Gross profit                                                 45            46            44
                                                             ----------    ----------    ----------
Operating expenses:
   Research and development                                     23            14            15
   Selling, general and administrative                          14            17            18
                                                             ----------    ----------    ----------
          Total operating expenses                              37            31            33
                                                             ----------    ----------    ----------
Income from operations                                           7            15            11
   Other income (expense), net                                   1             *            (2)
   Equity in loss of unconsolidated
      subsidiary                                                (2)            *            ---
Income before income taxes                                       6            15             9
                                                             ----------    ----------    ----------
Provision (benefit) for income taxes                             2            (1)            1
                                                             ==========    ==========    ==========

                                                             ----------    ----------    ----------
Net income                                                      4%            16%            8%
                                                             ==========    ==========    ==========
</TABLE>

*      Less than 1 percent
(tau)  Percentages may not total 100% due to rounding

FISCAL YEAR ENDED SEPTEMBER 30, 1996 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30,
1995

Net sales increased to $71.1 million in fiscal 1996 from $62.7 million in fiscal
1995, an increase of 13 percent. Substantially all net sales were derived from
rapid thermal processing (RTP) operations for both periods. The sales growth in
the current fiscal year was primarily due to the increase in unit sales of the
Company's Heatpulse(R) 8108 product and included sales to one customer of $14.0
million compared to $18.1 million in fiscal 1995. However, sales for the fourth
quarter of fiscal 1996 declined to $8.8 million as compared to $17.2 million in
the third quarter of fiscal 1996 and $19.7 million in the fourth quarter of
fiscal 1995. This decline reflects the semiconductor industry's slowing order
rate and competitive pressures. The average selling price of the Heatpulse 8108
decreased in fiscal 1996 due primarily to an increasing proportion of
distributor sales, which generally have lower selling prices than direct sales.
*The Company expects net sales for fiscal 1997, which will be generated
predominantly from the sale of the Company's Heatpulse 8800 and Heatpulse 8108
products, to be lower than the net sales achieved during fiscal 1996 due to the
semiconductor industry's slowing order rate and competitive pressures. *The
Company also believes that unit sales of the Company's 610 and 4100 Series
products will stay at a low and constant level of 3 to 5 systems per quarter
combined for these two products as they have for fiscal 1996 and fiscal 1995.

Sales to distributors were $27.0 million in fiscal 1996 compared to $12.3
million in the prior fiscal year. The Company utilizes distributors in certain
geographic regions. All of the Company's sales in Japan are through Canon Sales
Co., Inc. ("Canon"), and those in Europe and Korea are through Metron Technology
("Metron"). Sales to distributors generally result in a lower gross profit,
caused by lower selling prices, which are largely offset by reduced selling and
marketing expenses. In fiscal 1996, Canon represented 24% of net sales, compared
to 14% of net sales in fiscal 1995, and Metron represented 14% of net sales,
compared to 5% of net sales in fiscal 1995. The increase in sales to
distributors was primarily due to increased international sales both in terms of
actual sales and as a percent of total sales, as most international sales of the
Company are made through distributors. Domestic sales for the Company decreased
to $32.5 million in the current fiscal year from $42.9 million in fiscal 1995, a
decrease of 24 percent. The decrease in domestic sales is primarily due to the
semiconductor industry's slowing order rate and the loss of sales from a major
customer to a competitor. International sales for the Company increased to $38.6
million in the current fiscal year from $19.8 million in fiscal 1995, an
increase of 95


                                       14
<PAGE>   15
percent. As a percentage of net sales, international sales increased to 54% for
the current fiscal year from 32% in the prior fiscal year. This increased
percentage of international sales results primarily from substantially increased
sales in terms of absolute dollars, combined with declining domestic sales in
terms of absolute dollars. The increase in absolute dollars for international
sales in fiscal 1996 was primarily due to increased sales to Europe and Asia,
including Japan. *Based upon the geographic locations of semiconductor
manufacturers, the Company anticipates that international sales will continue to
account for a significant portion of net sales in fiscal 1997. *However, the
percentage of sales will vary on a quarterly basis depending on the timing of
orders and the relative strength of domestic sales. International sales are
typically denominated in United States dollars. *Because sales of the Company's
products are denominated in United States dollars, fluctuations in the value of
the dollar could increase or decrease the prices in local currencies of the
Company's products in foreign markets and make the Company's products relatively
more or less expensive than competitors' products that are denominated in local
currencies. Inflation has not had a material impact on the Company's net sales
or income from operations.

The Company's end-user customers include most of the world's leading
semiconductor manufacturers. For the year ended September 30, 1996, Intel
Corporation accounted for 20% of total net sales and NEC accounted for 17% of
total net sales. For the year ended September 30, 1995, Intel Corporation
accounted for 29% of total net sales, and International Business Machines
Corporation accounted for 12% of total net sales. *The Company expects that a
limited number of end-user customers will account for a significant percentage
of net sales in fiscal 1997, and there can be no assurance that any significant
end-user customer will continue to purchase the Company's products. *The loss of
any significant end-user customer, even if replaced by a different significant
end-user customer, could have a material adverse effect on the Company's
business, results of operations and financial condition. *In this regard, the
Company notes that Intel Corporation will be less significant to the Company in
fiscal 1997 than in fiscal 1996.

Gross profit increased to $31.7 million in fiscal 1996 from $29.0 million in the
prior fiscal year, an increase of 9 percent. However, gross profit for the
fourth quarter of fiscal 1996 declined to $2.8 million as compared to $7.2
million in the third quarter of fiscal 1996 and $9.3 million in the fourth
quarter of fiscal 1995. This decline reflects the semiconductor industry's
slowing order rate and competitive pressures. Gross profit increased from fiscal
1995 to fiscal 1996 as a result of increased sales volume. Gross profit as a
percentage of net sales declined to 45% in the current fiscal year from 46% in
fiscal 1995. The reduced gross profit percentage resulted primarily from a
decline in systems margin as the number of systems sold to distributors
increased, an increase in cost incurred on systems sold in Europe that required
additional customization to meet more stringent European electronics regulatory
standards and an increase in overhead costs as a result of the Company's move to
a new facility. This decrease in systems margin was partially offset by an
improvement in spares margin. *The Company expects that the gross profit
percentage for fiscal 1997 will be lower than in prior years due to the impact
of fixed overhead costs on lower expected sales volume.

Research and Development ("R&D") expenses increased to $16.7 million in the
current fiscal year from $8.9 million in the prior fiscal year, an increase of
87%. As a percentage of net sales, R&D expenses increased to 23% in fiscal 1996
from 14% in fiscal 1995, reflecting the Company's commitment to bring new
products to market. During fiscal year 1996, the Company introduced its newest
product, the Heatpulse 8800, which is expected to replace the current model
Heatpulse 8108 during fiscal 1997. The Heatpulse 8800 product is a new RTP
system designed for volume production environments, where process repeatability,
productivity and cost are critical considerations. This product was developed to
help semiconductor manufacturers improve performance in all three areas for the
full range of RTP process applications. The Company is also developing its next
generation platform that is being designed to provide previously unavailable RTP
capabilities, both in terms of process results and manufacturing performance,
for the 0.25 and 0.18 micron linewidths. *The next generation products are
scheduled for introduction in the second or third quarter of calendar 1997. *The
failure of the Company to timely develop this new platform, the failure of this
new platform to meet customer expectations regarding performance and cost or the
failure of this new platform to achieve market acceptance following product
introduction would each have a material adverse effect on the Company's
business, results of operations and financial condition. *The Company continues
to believe that significant investment in R&D is required to remain competitive;
however, it anticipates that such expenses in terms of absolute dollars will
decline toward the end of fiscal 1997, although such expenses as a percentage of
net sales may fluctuate. All R&D costs are expensed as incurred.

Selling, general and administrative ("SG&A") expenses decreased to $10.2 million
in fiscal 1996 from $10.6 million in fiscal 1995, a decrease of 3 percent. As a
percentage of net sales, SG&A expenses decreased to 14% in fiscal 1996 from 17%
in fiscal 1995, reflecting higher sales in the more recent period. The decrease
in absolute dollars for the current fiscal year was due primarily to increased
sales to distributors, which have lower selling and marketing expenses than
direct sales, and the Company's management of expenses in response to the
decline in sales during the second half of fiscal 1996, as well as a


                                       15
<PAGE>   16
reduction in sales commissions as a result of lower sales. *The Company
anticipates that SG&A expenses will decrease in absolute dollars throughout
fiscal 1997 due to lower sales commissions and the Company's continued cost
control measures, but will vary as a percentage of net sales.

Other income (expense), net was $772,000 of income in fiscal 1996 and $12,000 of
income in fiscal 1995. Interest income (net of interest expense) was $649,000 in
fiscal 1996, reflecting interest earned on investment of the Company's cash and
investments. Other income also included commissions on quartz sales of $190,000
earned in fiscal 1996.

Equity in loss of unconsolidated subsidiary was $1.2 million for fiscal 1996.
This represents the Company's share of the losses of AG Associates (Israel) Ltd.
("AG Israel") during fiscal 1996 as compared to $364,000 from May 1995 through
the end of fiscal 1995. In May 1995, a 51 percent interest in AG Israel was
acquired by Clal Electronics Industries Ltd. ("Clal Electronics"). The Company
retains a 49% interest in AG Israel and thus has accounted for its investment on
the equity method since June 1, 1995. Prior to that, AG Israel was accounted for
as a wholly-owned subsidiary of the Company and its results of operations were
included in the consolidated financial statements of the Company. As of
September 30, 1996, the Company's investment in AG Israel had been reduced to
zero. *Additional losses from AG Israel's operations will be recorded only to
the extent of any future investments by the Company. *The Company is considering
a proposal to invest additional amounts in AG Israel in conjunction with
proposed investments by other investors.

For fiscal 1996, the Company recorded income tax expense of $1.7 million
compared to a benefit for income taxes of $532,000 in fiscal 1995. As a result
of the significant increase in profitability during fiscal 1995, the completion
of the Company's initial public offering and the closing of the AG Israel
transaction with Clal Electronics, the Company reversed its valuation allowance
for deferred income taxes, resulting in a tax benefit for fiscal 1995. In fiscal
1996, the effective tax rate of 39% more closely approximates the statutory
rates of the jurisdictions in which the Company operates. The impact of AG
Israel losses, which are not deductible on the U.S. federal tax return of the
Company (9.0%), were offset in part by the tax benefits received from the
Company's export sales (4.9%). *The Company anticipates the fiscal 1997
effective tax rate to be similar to the rate experienced during fiscal 1996.

The Company's system backlog (consisting of product scheduled for delivery
within the next twelve months) as of September 30, 1996 was approximately $10.3
million as compared to $31.5 million at September 30, 1995. The decrease in
backlog was a result of the effects of the semiconductor industry's slowing
order rates as customers drastically slowed down their expansion plans, as well
as competitive pressures. The Company includes in its backlog customer purchase
orders that have been accepted and to which shipment dates have been assigned
within the next twelve months. All orders are subject to cancellation with
limited or no penalty. *Because of possible changes in the delivery schedules
and additions or cancellations of orders, the Company's backlog at any
particular date is not necessarily indicative of actual sales for any succeeding
period.

FISCAL YEAR ENDED SEPTEMBER 30, 1995 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30,
1994

Net sales increased to $62.7 million in fiscal 1995 from $40.2 million in fiscal
1994, an increase of 56 percent. Substantially all net sales were derived from
rapid thermal processing (RTP) operations for both periods. The sales growth in
fiscal 1995 was primarily due to the increase in unit sales of the Company's
Heatpulse 8108 product and included sales to one customer of $18.1 million
versus $3.4 million in fiscal 1994. The average selling price of the Heatpulse
8108 increased in fiscal 1995 due primarily to an increasing proportion of
direct sales, which generally have higher selling prices than sales to
distributors. Unit sales of the Company's other products remained relatively
stable from fiscal 1994 to fiscal 1995.

Sales to distributors were $12.3 million in fiscal 1995 compared to $11.3
million in the prior fiscal year. Sales to distributors generally resulted in
lower gross profit, caused by lower selling prices, which were largely offset by
reduced selling and marketing expenses. International sales for the Company
increased to $19.8 million in fiscal 1995 from $19.2 million in fiscal 1994, an
increase of 3%. As a percentage of net sales, international sales decreased to
32% for the current fiscal year from 48% in the prior fiscal year. This
declining percentage of international sales resulted primarily from U.S. sales
rising more rapidly during these periods. The increase in absolute dollars for
international sales in fiscal 1995 was primarily due to increased sales to the
Far East, primarily to Japan and Taiwan, and partially offset by a decrease in
sales by the Company's European distributor, principally as a result of
increased price competition.

Gross profit increased to $29.0 million in fiscal 1995 from $17.6 million in the
prior fiscal year, an increase of 65%. Gross profit as a percentage of net sales
improved to 46% in the fiscal 1995 from 44% in fiscal 1994. The improved gross
margin


                                       16
<PAGE>   17
percentage resulted primarily from an increasing proportion of direct sales,
which generally have higher gross margins than sales to distributors, and an
increase in sales to one manufacturer with specific feature requirements and to
customers selecting systems with more complex features.

Research and development ("R&D") expenses increased to $8.9 million in fiscal
year 1995 from $6.1 million in the prior fiscal year, an increase of 46%. As a
percentage of net sales, R&D expenses decreased to 14% in fiscal 1995 from 15%
in fiscal 1994, reflecting higher sales in the more recent period. The Company
continued its efforts to remain competitive through investments in the
development of new features for its current products. The increase in R&D
expenses in absolute dollars was primarily attributable to the addition of
personnel.

Selling, general and administrative ("SG&A") expenses increased to $10.6 million
in fiscal 1995 from $7.0 million in fiscal 1994, an increase of 50%. As a
percentage of net sales, SG&A expenses decreased to 17% in fiscal 1995 from 18%
in fiscal 1994, reflecting higher sales in the more recent period. The increase
in absolute dollars for fiscal 1995 was due primarily to the addition of
personnel to support the Company's growth.

Other income (expense), net was $12,000 of income in fiscal 1995 and $1.1
million of expense in fiscal 1994. Interest expense decreased to $370,000 in
fiscal 1995 from $570,000 in fiscal 1994 due primarily to lower average debt
balances and the repayment of all outstanding indebtedness under the line of
credit following the Company's initial public offering in fiscal 1995. Interest
income was $352,000 in fiscal 1995, reflecting interest earned on investment of
the proceeds from the Company's initial public offering. Other expense in fiscal
1994 included a charge of $400,000 for the revision of the terms of the
Investment Company of Bank Hapoalim Ltd.'s ("Hapoalim Investment Co.") minority
interest conversion rate, debenture conversion price and warrant price and
$190,000 related to a financing transaction that was not completed.

Equity in loss of unconsolidated subsidiary was $364,000 for fiscal 1995. This
represents the Company's share of the losses of AG Israel from May of 1995, when
a 51% interest in AG Israel was acquired by Clal Electronics, through September
30, 1995. The Company retains a 49% interest in AG Israel and thus has accounted
for its investment on the equity method since June 1, 1995. Prior to June 1,
1995, AG Israel was accounted for as a wholly-owned subsidiary of the Company
and its results of operations were included in the consolidated financial
statements of the Company.

For fiscal 1995, the Company recorded a benefit for income taxes of $532,000
compared to an expense of $137,000 in fiscal 1994. As a result of the
significant increase in profitability during the current fiscal year, the
completion of the Company's initial public offering and the closing of the AG
Israel transaction with Clal Electronics, the Company reversed its valuation
allowance for deferred income taxes resulting in a tax benefit for fiscal year
1995.

LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 1996, the Company had cash, cash equivalents and short-term
investments of $12.0 million, compared to $18.9 million as of September 30, 1995
and $1.6 million as of September 30, 1994. The decrease of $6.9 million from
fiscal 1995 to fiscal 1996 was primarily attributable to capital expenditures
relating to the Company's move to a new facility, an increase in inventory
levels and its required $1 million investment in AG Israel. The increase of
$17.3 million from fiscal 1994 to fiscal 1995 was primarily due to the Company's
initial public offering in May 1995. Working capital decreased to $26.9 million
at September 30, 1996 from $28.6 million at September 30, 1995 and a deficiency
of $1.3 million as of September 30, 1994. During fiscal 1996, the Company
negotiated a $5 million revolving line of credit, which is available through
August 1, 1997. The line is collateralized by all assets of the Company except
intellectual property. Borrowings bear interest at prime plus 1.25% per annum.
There were no outstanding borrowings at September 30, 1996.

The Company's operating activities provided cash of $673,000 during fiscal 1996.
Net income of $2.7 million, a decrease in accounts receivable of $4.9 million
and losses from equity in AG Israel of $1.2 million were offset by increases in
inventory of $3.3 million along with decreases in accounts payable of $2.4
million, accrued liabilities of $2.2 million and refundable income taxes of $2.1
million. The decrease in accounts receivable was due to increased collection
activity and declining sales during the fourth quarter of fiscal 1996. The
increase in inventory was primarily due to increased levels of raw materials in
preparation for meeting the Company's shipment targets for fiscal 1996, as well
as the stocking of offsite spares inventories. The decrease in payables was
primarily due to a decrease in purchases during the second half of fiscal 1996.
The decrease in accruals was primarily due to reduced commission expense and
other payroll accruals and lower level of operations during the second half of
1996. Cash provided by operating activities was $1.4 million in fiscal 1995, as
net income of $9.8 million and an increase in accounts payable of $3.2 million,
due largely to increased purchases of inventory


                                       17
<PAGE>   18
and the growth in operating expenses, were partially offset by an increase in
accounts receivable of $7.3 million, reflecting an increase in net sales, an
increase in inventories of $4.1 million to support higher production volumes and
an increase in deferred tax assets of $3.9 million, principally due to increased
profitability resulting in a reversal of the valuation allowance. Cash provided
by operating activities was $4.2 million in fiscal 1994, as net income of $3.2
million and an increase in accrued liabilities of $1.4 million, due to increased
commission and payroll accruals, were offset by a decrease in customer advances
and deferred revenues.

Cash used in investing activities was $7.3 million in fiscal 1996, $13.5 million
in fiscal 1995 and $649,000 in fiscal 1994. Capital expenditures, purchases of
short term investments and a required $1 million equity investment in AG Israel
were the principal uses of cash in investment activities in fiscal 1996,
partially offset by maturities of short term investments. Purchases of short
term investments, capital expenditures and an equity investment in AG Israel
were the principal uses of cash in investment activities in fiscal 1995. Capital
expenditures were approximately $6.9 million in fiscal 1996, $2.2 million in
fiscal 1995 and approximately $800,000 in fiscal 1994; the Company did not enter
into any new lease agreements in fiscal 1996; the Company leased assets with a
cost of $880,000 in fiscal 1995 and $912,000 in fiscal 1994. Capital
expenditures in fiscal 1996 were made primarily to support increased personnel
levels and facilities upgrades. The Company relocated its entire operations from
Sunnyvale, California to San Jose, California during October 1995. The cost of
leasehold improvements for this relocation was $2.2 million. *The Company
expects that capital expenditures will be approximately $3.2 million in fiscal
1997, principally to support new product development. *The Company is
considering a proposal to invest additional amounts in AG Israel in conjunction
with proposed investments by other investors.

Financing activities provided cash of $316,000 in fiscal 1996 primarily from the
sale of common stock to employees and collections of employee notes receivable,
partially offset by the reduction in long-term lease obligations. Financing
activities provided cash of $18.8 million in fiscal 1995 principally from net
proceeds of $20.2 million resulting from the Company's initial public offering
of Common Stock and short-term borrowings to support the cash used by operating
activities during the period partially offset by repayments of short-term
borrowings. Financing activities used cash of $2.8 million in fiscal 1994
principally reflecting the repayment of short-term borrowings, obligations under
capital leases and reductions in long-term debt.

*The Company believes that current cash and short-term investment balances,
together with existing sources of liquidity, will satisfy the Company's
anticipated liquidity and working capital requirements through the next twelve
months. *However, due to the uncertain nature of the industry, competitive
market conditions and the strong commitment to developing the Company's
next-generation products, liquidity and working capital are difficult to
anticipate beyond the next twelve months. *There can be no assurance that
additional financing, when required, will be available, or if available, can be
obtained on terms satisfactory to the Company.


CHANGE IN INDEPENDENT AUDITORS

         Effective in June 1994, the Company selected Deloitte & Touche LLP to
replace Ernst & Young LLP as independent auditors for the Company. The decision
to change auditors was approved by the Company's Board of Directors. The reports
of Ernst & Young LLP on the financial statements of the Company for the fiscal
year ended September 30, 1993 did not contain any adverse opinion or disclaimer
of opinion and was not qualified or modified as to uncertainty, audit scope or
accounting principles. During the fiscal year ended September 30, 1993 and
subsequent interim periods through June 1994, there were no disagreements with
the former auditors on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure, with
disagreements (if not resolved to the satisfaction of the former auditors) would
have caused them to make reference in connection with their report to the
subject matter of disagreement.

ITEM 8.  CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The Company's Consolidated Financial Statements as of September 30,
1996 and 1995 and for the Three Years in the Period Ended September 30, 1996 and
Independent Auditors' Report follow. The pages of the Company's Consolidated
Financial Statements are independently numbered from this Form 10-K.

                                       18
<PAGE>   19
               AG ASSOCIATES, INC.

               CONSOLIDATED FINANCIAL STATEMENTS AS OF
               SEPTEMBER 30, 1996 AND 1995 AND FOR THE
               THREE YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1996
               AND INDEPENDENT AUDITORS' REPORT

<PAGE>   20


INDEPENDENT AUDITORS' REPORT


To the Board of Directors and Shareholders of
   AG Associates, Inc.:

We have audited the accompanying consolidated balance sheets of AG Associates,
Inc. and its subsidiary (the Company) as of September 30, 1996 and 1995 and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended September 30, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the fiscal 1994 income statement of AG Associates
(Israel) Ltd. (a consolidated subsidiary in fiscal 1994) which statement
reflects total costs and expenses of $1,170,000 for the year ended September 30,
1994. That statement was audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to the amounts included
for AG Associates (Israel) Ltd. for fiscal 1994 is based solely on the report of
such other auditors.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 and the report of the other auditors provide a
reasonable basis for our opinion.

In our opinion, based on our audits and the report of the auditors of AG
Associates (Israel), Ltd. as described above, such consolidated financial
statements present fairly, in all material respects, the financial position of
AG Associates, Inc. and its subsidiary at September 30, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended September 30, 1996 in conformity with generally accepted
accounting principles.



DELOITTE & TOUCHE LLP

San Jose, California
October 25, 1996
<PAGE>   21



                          INDEPENDENT AUDITORS' REPORT


The Board of Directors and Shareholders of
      AG Associates (Israel) Ltd.


We have examined the balance sheet of AG Associates (Israel) Ltd. as of
September 30, 1993 and 1994 and the related statements of loss, changes in
shareholders' equity and cash flows for the period from inception (April 2,
1992) to September 30, 1992 and for the years ended September 39, 1993 and 1994
(not presented separately herein). Our examinations were made in accordance with
generally accepted auditing standards, including those prescribed by the Israeli
Auditors (Mode of Performance) Regulations, 1973, and accordingly we have
applied such auditing procedures as we considered necessary in the
circumstances.

In our opinion, the aforementioned financial statements present fairly, in
conformity with accounting principles generally accepted in Israel and in the
United States (as applicable to the aforementioned financial statements, such
accounting principles are practically identical), the financial position of the
company at September 30, 1993 and 1994, and the results of its operations and
its cash flows for the period ended September 30, 1992 and for the years ended
September 30, 1993 and 1994.

Without qualifying our opinion, we draw attention to the fact that the company
has suffered losses in considerable amounts since incorporation and is dependent
on its parent company in the United States.


KESSELMAN & KESSELMAN

Haifa, Israel
  November 8, 1994
<PAGE>   22
AG ASSOCIATES, INC.

CONSOLIDATED  BALANCE  SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                              SEPTEMBER 30,
                                                                     ----------------------------
ASSETS                                                                  1996              1995
                                                                        ----              ----

<S>                                                                  <C>                <C>
Current assets:
  Cash and equivalents                                               $  1,996           $  8,258
  Short-term investments                                                9,989             10,600
  Receivables (net of allowances of $903 and $1,456)                    8,560             13,508
  Inventories                                                          11,668              8,394
  Income taxes refundable                                               1,463               --
  Deferred income taxes                                                 2,859              3,665
  Prepaid expenses and other current assets                               462                556
                                                                     --------           --------

           Total current assets                                        36,997             44,981

Property and equipment - net                                            8,210              3,453

Deferred income taxes                                                     645                239

Investment in AG Israel                                                  --                  152
                                                                     --------           --------

Total                                                                $ 45,852           $ 48,825
                                                                     ========           ========


LIABILITIES  AND  SHAREHOLDERS'  EQUITY
Current liabilities:
  Accounts payable                                                   $  4,669           $  7,041
  Accrued liabilities                                                   5,011              7,170
  Current portion of capital lease obligations                            222                321
  Income taxes payable                                                   --                  650
  Customer advances and deferred revenues                                 245              1,150
                                                                     --------           --------
           Total current liabilities                                   10,147             16,332

Capital lease obligations                                                  11                193

Commitments (Notes 7 and 14)

Shareholders' equity:
  Common stock, no par value: 25,000,000 shares authorized;
    shares outstanding: 1996 - 5,943,503; 1995 - 5,836,399             35,640             35,135
  Notes receivable from shareholders                                     --                  (92)
  Deferred stock compensation                                             (17)               (81)
  Net unrealized loss on short-term investments                           (10)              --
  Retained earnings (accumulated deficit)                                  81             (2,662)
                                                                     --------           --------
           Total shareholders' equity                                  35,694             32,300
                                                                     --------           --------
Total                                                                $ 45,852           $ 48,825
                                                                     ========           ========
</TABLE>


See notes to consolidated financial statements.

-3-
<PAGE>   23
AG ASSOCIATES, INC.

CONSOLIDATED INCOME STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


<TABLE>
<CAPTION>
                                                                                        YEARS ENDED SEPTEMBER 30,
                                                                             -----------------------------------------------
                                                                               1996               1995                1994
                                                                               ----               ----                ----

<S>                                                                          <C>                <C>                <C>
Net sales (including sales to a shareholder/distributor of $17,333,
   $9,132 and $5,321)                                                        $ 71,089           $ 62,725           $ 40,251
Cost of sales                                                                  39,365             33,697             22,673
                                                                             --------           --------           --------

  Gross profit                                                                 31,724             29,028             17,578
                                                                             --------           --------           --------
Operating expenses:
  Research and development                                                     16,653              8,893              6,078
  Selling, general and administrative                                          10,204             10,562              7,035
                                                                             --------           --------           --------

           Total                                                               26,857             19,455             13,113
                                                                             --------           --------           --------
Income from operations                                                          4,867              9,573              4,465
                                                                             --------           --------           --------

Other income and expense:
  Interest income                                                                 708                352               --
  Interest expense                                                                (59)              (370)              (570)
  Equity in loss of unconsolidated subsidiary                                  (1,152)              (364)              --
  Other, net                                                                      123                 30               (534)
                                                                             --------           --------           --------

Income before provision (benefit) for income taxes                              4,487              9,221              3,361

Provision (benefit) for income taxes                                            1,744               (532)               137
                                                                             --------           --------           --------

Net income                                                                   $  2,743           $  9,753           $  3,224
                                                                             ========           ========           ========

Net income per share                                                         $   0.45           $   2.05           $   0.87
                                                                             ========           ========           ========

Shares used in per share calculations                                           6,140              4,770              3,772
                                                                             ========           ========           ========
</TABLE>


See notes to consolidated financial statements.

-4-
<PAGE>   24
AG ASSOCIATES, INC

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
(DOLLARS IN THOUSANDS)


<TABLE>
<CAPTION>
                                                         CONVERTIBLE
                                                       PREFERRED STOCK               COMMON STOCK
                                                 -------------------------     -------------------------
                                                   SHARES          AMOUNT        SHARES         AMOUNT
                                                 ----------     ----------     ----------     ----------

<S>                                               <C>          <C>             <C>           <C>
BALANCES,  October 1, 1993                           31,250     $       50      2,946,329     $    8,153

Issuance of common stock                               --             --            1,583              8
Exercise of options                                    --             --            7,562             30
Revision of warrants and debenture terms               --             --             --              400
Deferred stock compensation                            --             --             --              230
Preferred stock dividends                              --             --             --             --
Stock released from Rapro escrow                       --             --          (28,146)           (56)
Net income                                             --             --             --             --
                                                 ----------     ----------     ----------     ----------

BALANCES, September 30, 1994                         31,250             50      2,927,328          8,765

Conversion of minority equity interest                 --             --          271,739          1,979
Initial public offering of common stock                --             --        2,070,000         20,232
Conversion of preferred stock                       (31,250)           (50)         7,813             50
Conversion of subordinated debentures                  --             --          271,739          2,000
Exercise of warrants                                   --             --          173,750          1,529
Common stock issued for services                       --             --           18,750            170
Exercise of options                                    --             --           95,280            410
Amortization of deferred stock compensation            --             --             --             --
Preferred stock dividends                              --             --             --             --
Net income                                             --             --             --             --
                                                 ----------     ----------     ----------     ----------

BALANCES, September 30, 1995                           --             --        5,836,399         35,135

Common stock issued under employee stock
  purchase plan                                        --             --           52,694            310
Exercise of options                                    --             --           54,410            195
Amortization of deferred stock compensation            --             --             --             --
Net unrealized loss on short-term investments          --             --             --             --
Collection of notes receivable                         --             --             --             --
Net income                                             --             --             --             --
                                                 ----------     ----------     ----------     ----------

BALANCES, September 30, 1996                           --       $     --        5,943,503     $   35,640
                                                 ==========     ==========     ==========     ==========
</TABLE>




<TABLE>
<CAPTION>
                                                                                          NET
                                                                                       UNREALIZED
                                                     NOTES                               LOSS ON        RETAINED         TOTAL
                                                  RECEIVABLE            DEFERRED          SHORT-        EARNINGS      SHAREHOLDERS'
                                                     FROM                STOCK            TERM        (ACCUMULATED       EQUITY
                                                 SHAREHOLDERS         COMPENSATION    INVESTMENTS       DEFICIT)      (DEFICIENCY)
                                                 ------------         ------------    ------------    ------------    ------------

<S>                                               <C>                 <C>             <C>              <C>              <C>
BALANCES,  October 1, 1993                           $    (14)              $-         $   --           $(15,634)        $ (7,445)

Issuance of common stock                                 --               --               --               --                  8
Exercise of options                                      --               --               --               --                 30
Revision of warrants and debenture terms                 --               --               --               --                400
Deferred stock compensation                              --               (128)            --               --                102
Preferred stock dividends                                --               --               --                 (3)              (3)
Stock released from Rapro escrow                         --               --               --               --                (56)
Net income                                               --               --               --              3,224            3,224
                                                 ------------         ------------    ------------    ------------    ------------

BALANCES, September 30, 1994                              (14)            (128)            --            (12,413)          (3,740)

Conversion of minority equity interest                   --               --               --               --              1,979
Initial public offering of common stock                  --               --               --               --             20,232
Conversion of preferred stock                            --               --               --               --               --
Conversion of subordinated debentures                    --               --               --               --              2,000
Exercise of warrants                                     --               --               --               --              1,529
Common stock issued for services                         --               --               --               --                170
Exercise of options                                       (78)            --               --               --                332
Amortization of deferred stock compensation              --                 47             --               --                 47
Preferred stock dividends                                --               --               --                 (2)              (2)
Net income                                               --               --               --              9,753            9,753
                                                 ------------         ------------    ------------    ------------    ------------

BALANCES, September 30, 1995                              (92)             (81)            --             (2,662)          32,300

Common stock issued under employee stock
  purchase plan                                          --               --               --               --                310
Exercise of options                                      --               --               --               --                195
Amortization of deferred stock compensation              --                 64             --               --                 64
Net unrealized loss on short-term investments            --               --                (10)            --                (10)
Collection of notes receivable                             92             --               --               --                 92
Net income                                               --               --               --              2,743            2,743
                                                 ------------         ------------    ------------    ------------    ------------

BALANCES, September 30, 1996                         $   --           $    (17)        $    (10)        $     81         $ 35,694
                                                 ============         ============    ============    ============    ============
</TABLE>

See notes to consolidated financial statements.

-5-
<PAGE>   25
AG ASSOCIATES, INC.

CONSOLIDATED  STATEMENTS  OF  CASH  FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
                                                                                      YEAR ENDED SEPTEMBER 30,
                                                                              ------------------------------------------
                                                                                1996             1995             1994
                                                                              --------         --------         --------
<S>                                                                           <C>              <C>              <C>
Cash flows from operating activities:
  Net income                                                                  $  2,743         $  9,753         $  3,224
  Reconciliation to net cash provided by operating activities:
    Depreciation and amortization                                                2,078            1,073              608
    Equity in loss of unconsolidated subsidiary                                  1,152              364             --
    Deferred income taxes                                                          400           (3,904)            --
    Deferred stock compensation and stock issued for services rendered              64              217              102
    Interest accrued (paid) on convertible subordinated debentures                --               (107)              97
    Revision of warrant and debenture terms                                       --               --                400
    Other                                                                           17              105              (56)
    Changes in assets and liabilities:
      Receivables                                                                4,948           (7,276)            (810)
      Inventories                                                               (3,274)          (4,071)             206
      Prepaid expenses and other current assets                                     94             (327)             (55)
      Accounts payable                                                          (2,372)           3,201               19
      Accrued liabilities                                                       (2,159)           2,164            1,445
      Customer advances and deferred revenues                                     (905)            (259)          (1,037)
      Income taxes payable/refundable                                           (2,113)             441               12
                                                                              --------         --------         --------

           Net cash provided by operating activities                               673            1,374            4,155
                                                                              --------         --------         --------

Cash flows from investing activities:
  Purchases of short-term investments                                           (3,199)         (10,600)            --
  Maturities of held-to-maturity investments                                     3,800             --               --
  Investment in AG Israel                                                       (1,000)            (782)            --
  Other assets                                                                    --                 15              160
  Capital expenditures                                                          (6,852)          (2,173)            (809)
                                                                              --------         --------         --------

           Net cash used for investing activities                               (7,251)         (13,540)            (649)
                                                                              --------         --------         --------

Cash flows from financing activities:
  Short-term borrowing                                                            --              2,000            1,600
  Repayments of short-term borrowing                                              --             (4,400)          (3,700)
  Reductions in long-term obligations                                             (281)            (865)            (742)
  Proceeds from initial public offering                                           --             20,232             --
  Sales of common stock                                                            505            1,861               38
  Collection of notes receivable                                                    92             --               --
  Preferred stock dividends                                                       --                 (2)              (3)
                                                                              --------         --------         --------

           Net cash provided by (used for) financing activities                    316           18,826           (2,807)
                                                                              --------         --------         --------

Net increase (decrease) in cash and equivalents                                 (6,262)           6,660              699

Cash and equivalents at beginning of period                                      8,258            1,598              899
                                                                              --------         --------         --------

Cash and equivalents at end of period                                         $  1,996         $  8,258         $  1,598
                                                                              ========         ========         ========

                                                                                                              (Continued)
</TABLE>

-6-
<PAGE>   26
AG ASSOCIATES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
                                                                                 YEAR ENDED SEPTEMBER 30,
                                                                       ---------------------------------------------
                                                                         1996               1995              1994
                                                                         ----               ----              ----

<S>                                                                     <C>               <C>                <C>
Supplemental schedule of noncash investing and financing
  activities:
  Assets acquired under capital leases                                       $-            $   280            $ 435
                                                                        =======            =======            =====
  Deferred stock compensation                                                $-                 $-            $ 230
                                                                        =======            =======            =====
  Conversion of subordinated debentures, preferred stock and
    minority interests                                                       $-            $ 4,029               $-
                                                                        =======            =======            =====
  Conversion of minority equity interest                                     $-            $ 1,979               $-
                                                                        =======            =======            =====
  Exercise of stock options in exchange for notes receivable                 $-            $    78               $-
                                                                        =======            =======            =====
  Transfer of net liabilities to unconsolidated subsidiary:
    Property                                                                               $   101
    Current liabilities                                                                       (285)
    Capital leases                                                                             (82)
                                                                                            -------

    Net                                                                                      $(266)
                                                                                            =======
Supplemental disclosure of cash flow information
  Cash paid during the period for:
    Interest                                                            $    50            $   369            $ 471
                                                                        =======            =======            =====
    Income taxes                                                        $ 3,207            $ 2,930            $ 104
                                                                        =======            =======            =====
</TABLE>


See notes to consolidated financial statements.

-7-
<PAGE>   27
AG ASSOCIATES, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994

1.    ORGANIZATION  AND  SIGNIFICANT  ACCOUNTING  POLICIES

      ORGANIZATION - AG Associates, Inc. (the Company) was incorporated in
      California in October 1981. The Company designs, manufactures, markets and
      supports advanced single-wafer, rapid thermal processing (RTP) equipment
      used in the manufacture of integrated circuits. The Company's products,
      marketed under the Heatpulse(R) name, utilize high intensity light to
      precisely heat a single silicon wafer which results in a chemical process
      needed to produce an integrated circuit. These products are manufactured
      at the Company's California location and sold primarily to semiconductor
      manufacturers through a direct sales force in the United States and
      foreign distributors.

      CONSOLIDATION - The consolidated financial statements for fiscal 1996
      include the accounts of AG Associates, Inc. and its wholly-owned
      subsidiary, Rapro Technology, Inc. (Rapro). All significant intercompany
      balances and transactions have been eliminated. The consolidated financial
      statements of the Company for fiscal 1995 and 1994 also include the
      results of operations of AG Associates (Israel) Ltd. (AG Israel) for the
      period through May 31, 1995. As a result of the sale of the controlling
      interest of AG Israel (see Note 13), the Company has accounted for its
      remaining 49% interest in AG Israel using the equity method since June 1,
      1995.

      CONCENTRATION OF CREDIT RISK - Financial instruments that potentially
      subject the Company to a concentration of credit risk consist primarily of
      cash, cash equivalents and short-term investments, as well as accounts
      receivable. The Company has placed the majority of its cash and cash
      equivalents and short-term investments with high-quality financial
      institutions.

      The Company sells its products primarily to large companies in the
      semiconductor industry. Credit risk is further mitigated by the Company's
      credit evaluation process. The Company does not require collateral or
      other security to support receivables. While the Company maintains
      allowances for potential credit losses, actual bad debt losses to date
      have not been material.

      FINANCIAL STATEMENT 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, liabilities, revenues and expenses. Such estimates
      include the level of the allowance for potentially uncollectible
      receivables; inventory reserves for obsolete, slow moving or nonsalable
      inventory, certain accruals and estimated costs for installation, warranty
      and other customer support obligations. Actual results could differ from
      these estimates.

      CASH EQUIVALENTS - Cash equivalents are highly liquid debt investments
      acquired with a maturity of three months or less at date of purchase.

      SHORT-TERM INVESTMENTS - The Company has classified its short-term
      corporate debt securities and its adjustable rate preferred stock
      investments as "available for sale" securities, and the carrying value of
      these securities is fair market value, as determined by quoted market
      prices. Net unrealized losses on these investments have been recorded as a
      separate component of shareholders' equity, net of related tax.

      INVENTORIES - Inventories are stated at the lower of cost (first-in,
      first-out) or market. The Company reviews the levels of its inventories in
      light of current and forecasted demand to identify and provide reserves
      for obsolete, slow-moving, or nonsalable inventory.

-8-
<PAGE>   28
      PROPERTY AND EQUIPMENT - Property and equipment are stated at cost.
      Depreciation is provided using the straight-line method over estimated
      useful lives of three to five years. Equipment under capital lease and
      leasehold improvements are amortized over the shorter of their estimated
      useful lives or the lease term.

      RESEARCH AND DEVELOPMENT - All research and development costs are expensed
      as incurred. The Company's products include certain software applications
      which are integral to the operation of the product. The costs to develop
      such software have not been capitalized as the Company believes its
      current software development process is essentially completed concurrent
      with the establishment of the technological feasibility of the software
      and/or development of the related hardware.

      REVENUE RECOGNITION - Sales are generally recognized upon shipment.
      Estimated costs for installation, warranty and other customer support
      obligations which are considered insignificant, are accrued in the period
      that sales are recognized. Services outside the warranty period are
      generally provided to customers on a "time and materials" basis, and are
      recognized when the services are performed.

      INCOME TAXES - The Company provides for income taxes using the asset and
      liability approach defined by Statement of Financial Accounting Standards
      No. 109 (SFAS 109), "Accounting for Income Taxes."

      NET INCOME PER SHARE - Net income per share is based upon the weighted
      average number of common and dilutive common equivalent shares (common
      stock options, warrants and securities convertible into the Company's
      common stock) outstanding. Net income for fiscal 1994 is adjusted for the
      interest on convertible debentures assumed converted.

2.    INVESTMENTS

      Short-term investments at September 30 consist of (in thousands):


<TABLE>
<CAPTION>
                                                                   GROSS                 GROSS                FAIR
                                              AMORTIZED          UNREALIZED            UNREALIZED            MARKET
1996                                             COST              GAINS                 LOSSES              VALUE
                                              --------            --------             --------             --------

Available-for-sale investments:
<S>                                           <C>                 <C>                 <C>                  <C>
  Adjustable rate preferred stocks            $  2,500            $     --             $     --             $  2,500
  Corporate debt securities                      7,499                  10                  (20)               7,489
                                              --------            --------             --------             --------

                                              $  9,999            $     10             $    (20)            $  9,989
                                              ========            ========             ========             ========
                                                                                                                
1995
                                                                                                            
Available-for-sale investments -
  Adjustable rate preferred stocks            $  6,800            $     --             $    --              $  6,800
Held-to-maturity investments -
  Corporate debt securities                      3,800                   3                  (26)               3,777
                                              --------            --------             --------             --------

                                              $ 10,600            $      3             $    (26)            $ 10,577
                                              ========            ========             ========             ========
</TABLE>

      There were no realized gains or losses for the years ended September 30,
      1996 and 1995. All corporate debt securities held at September 30, 1996
      mature within one year.

-9-
<PAGE>   29
3.    INVENTORIES

      Inventories consist of (in thousands):

<TABLE>
<CAPTION>
                                                   SEPTEMBER 30,
                                           ---------------------------
                                             1996               1995
                                             ----               ----

<S>                                        <C>                 <C>
Raw materials                              $   7,865           $ 3,819
Work-in-process                                3,803             4,575
                                           ----------          -------

                                           $  11,668           $ 8,394
                                           ==========        =========
</TABLE>


      Inventories are shown net of reserves for obsolete, slow-moving, and
      nonsalable inventory of $3,289,000 and $2,669,000 at September 30, 1996
      and 1995, respectively.

4.    PROPERTY AND EQUIPMENT

      Property and equipment consist of (in thousands):

<TABLE>
<CAPTION>
                                                            SEPTEMBER 30,
                                                      -------------------------
                                                        1996             1995
                                                      --------         --------

<S>                                                   <C>              <C>
Machinery and equipment                               $  9,534         $  5,535
Furniture and fixtures                                     643            1,698
Leasehold improvements                                   2,273            1,221
Construction in progress                                   235              499
                                                      --------         --------

Total                                                   12,685            8,953
Accumulated depreciation and amortization               (4,475)          (5,500)
                                                      --------         --------

Property and equipment - net                          $  8,210         $  3,453
                                                      ========         ========
</TABLE>

5.    ACCRUED  LIABILITIES

      Accrued liabilities consist of (in thousands):


<TABLE>
<CAPTION>
                                                              SEPTEMBER 30,
                                                      --------------------------
                                                       1996                1995
                                                      ------              ------

<S>                                                   <C>                 <C>
Warranty reserve                                      $2,440              $2,651
Compensation and benefits                              1,186               1,630
Commissions                                              502                 850
Other                                                    883               2,039
                                                      ------              ------

                                                      $5,011              $7,170
                                                      ======              ======
</TABLE>


6.    BORROWING  ARRANGEMENTS

      The Company has a line of credit with a bank which provides for borrowings
      of up to $5,000,000, limited to outstanding accounts receivable, as
      defined, which expires August 1, 1997. The line of credit is
      collateralized by substantially all of the Company's assets. Advances bear
      interest at the bank's reference rate (8.25% at September 30, 1996) plus
      1.25%. At September 30, 1996, no balance was outstanding under this line.

-10-
<PAGE>   30
      The line of credit is subject to certain financial covenants including
      maintenance of a minimum quick ratio of 1.25:1 and tangible net worth of
      $32,000,000 and a maximum ratio of debt to total net worth of 1:1 and
      maximum quarterly net loss of $2,050,000, $1,750,000, $1,550,000, and
      $650,000 for the fourth quarter of fiscal 1996 and the first, second and
      third quarters of fiscal 1997, respectively. At September 30, 1996, the
      Company is in compliance with these covenants.

7.    LEASES

      Equipment with a cost and accumulated amortization of $714,000 and
      $499,000 at September 30, 1996, respectively, ($880,000 and $395,000 at
      September 30, 1995) has been leased under capital leases.

      In July 1995, the Company entered into a seven year lease, with an option
      for a five-year extension, for a 115,000 square foot office and
      manufacturing facility, located in San Jose, California. The Company
      commenced occupation of the new site in November 1995.

      Future minimum annual capital and operating lease commitments at September
30, 1996 are as follows (in thousands):


<TABLE>
<CAPTION>
                                              OPERATING        CAPITAL
                                               LEASES          LEASES
                                              --------         -------

<C>                                            <C>             <C>
1997                                           $  868          $  228
1998                                              869              16
1999                                              897              --
2000                                              931              --
2001                                              966              --
Thereafter through 2002                         1,001              --
                                               ------          ------

Total minimum lease payments                   $5,532             244
                                               ======
Amount representing interest                                       11
                                                               ------
Present value of minimum lease payments                        $  233
                                                               ======
</TABLE>


      Rent expense for operating leases was approximately $1,134,000, $684,000
      and $661,000 for the years ended September 30, 1996, 1995 and 1994,
      respectively.

8.    SHAREHOLDERS'  EQUITY

      SERIES A CONVERTIBLE PREFERRED STOCK

      Upon consummation of the Company's initial public offering in May 1995,
      all Series A convertible preferred stock was automatically converted into
      7,813 shares of common stock.

      COMMON STOCK

      In May 1995, the Company completed an initial public offering of 2,070,000
      shares of common stock, including the underwriter's overallotment of
      270,000 shares, resulting in total proceeds to the Company of $20,232,000,
      net of issuance costs.

      During fiscal 1993, the Company issued $2,000,000 in convertible
      subordinated debentures (the Debentures) to the Investment Company of Bank
      of Hapoalim Ltd. (Hapoalim Investment Co.). In May 1995, at the election
      of Hapoalim Investment Co. and upon consummation of the Company's initial
      public offering, principal on the Debentures was converted into 271,739
      shares of the Company's voting common stock at a price of $7.36 per share.

-11-
<PAGE>   31
      In addition, Hapoalim Investment Co. had a warrant to purchase 173,750
      shares of the Company's common stock. In connection with the public
      offering in May 1995, the warrant was exercised, resulting in proceeds to
      the Company of $1,529,000.

      NOTES RECEIVABLE FROM SHAREHOLDERS

      Certain notes had been received from officers for the acquisition of
      shares of common stock. All notes were canceled as of September 30, 1996.

      STOCK OPTION AND PURCHASE PLANS

      Under the Company's stock option plans (the Plans), 1,500,000 shares of
      Common Stock are reserved for the grant of incentive or nonstatutory stock
      options and the direct award or sale of shares to employees, directors,
      contractors and consultants. Under the Plans, options are granted at fair
      value at the date of grant as determined by the Board of Directors.
      Generally, such options become exercisable over periods of one to four
      years and expire ten years from the grant date.

      In October 1995, the Financial Accounting Standards Board issued Statement
      of Financial Accounting Standards No. 123, "Accounting for Stock-Based
      Compensation." The new standard defines a fair value method of accounting
      for stock options and other equity instruments, such as stock purchase
      plans. Under this method, compensation cost is measured based on the fair
      value of the stock award when granted and is recognized as an expense over
      the service period, which is usually the vesting period. This standard
      will be effective for the Company beginning in fiscal 1997 and requires
      measurement of awards made beginning in fiscal 1996.

      The new standard permits companies to continue to account for equity
      transactions with employees under existing accounting rules, but requires
      disclosure in a note to the financial statements of the pro forma effect
      of net income and earnings per share as if the company had applied the new
      method of accounting. The Company intends to implement these disclosure
      requirements for its stock option plans. As a result, for options issued
      to employees, adoption of the new standard will not impact reported
      earnings or earnings per share, and will have no effect on the Company's
      cash flows.

-12-
<PAGE>   32
      Option activity under the Plans was as follows:

<TABLE>
<CAPTION>
                                        NUMBER              OPTION PRICE
                                       OF SHARES              PER SHARE
                                       ---------        ----------------------

<S>                                    <C>              <C>
Outstanding, October 1, 1993            198,881         $ 0.80     --   $ 9.24

Granted                                 509,350         $ 3.00     --   $ 4.00
Exercised                                (7,562)        $ 0.80     --   $ 6.96
Canceled                               (237,889)        $ 0.80     --   $ 9.24
                                       ---------

Outstanding, September 30, 1994         462,780         $ 2.32     --   $ 9.24

Granted                                 414,824         $ 7.60     --   $33.19
Exercised                               (95,280)        $ 2.32     --   $ 9.24
Canceled                                (63,347)        $ 2.40     --   $ 8.50
                                       ---------

Outstanding, September 30, 1995         718,977         $ 2.40     --   $33.19

Granted                                 868,363         $ 5.38     --   $31.21
Exercised                               (54,410)        $ 2.40     --   $ 9.24
Canceled                               (725,014)        $ 4.00     --   $33.19
                                       ---------

Outstanding, September 30, 1996         807,916         $ 2.40     --   $31.21
                                       =========
</TABLE>

      At September 30, 1996, the weighted average exercise price of outstanding
      options was $6.44. In addition, 229,979 options were exercisable and
      637,674 options were available for future grant.

      As of September 30, 1996 and 1995, nonqualified options to purchase 74,934
      and 4,375 shares, respectively, were outstanding to consultants and
      directors at prices ranging from $3.60 to $16.71.

      In June 1996, the Company canceled options to purchase 495,439 shares of
      common stock exercisable at $7.38 to $33.19 per share and issued
      replacement options with an exercise price of $7.21 per share.

      In May 1994, the Company canceled options to purchase 86,875 shares of
      common stock exercisable at $4.80 to $7.40 per share and issued
      replacement options with an exercise price of $4.00 per share.

      In connection with certain grants of certain stock options to employees in
      fiscal 1994, the Company had recorded $230,000 for the difference between
      the deemed fair value for accounting purposes and the option price as
      determined by the Board at the date of grant. Of such amount, $102,000
      related to option grants which had previously vested and accordingly were
      expensed in fiscal 1994; the remaining $128,000 is presented as a
      reduction of shareholders' equity and is being amortized over the 48-month
      vesting period of the related stock options. Amortization of deferred
      stock compensation for 1996 and 1995 was $64,000 and $47,000,
      respectively.

      In November 1994, the Company reserved 50,000 shares for a directors stock
      option plan. Options to exercise 6,000 shares at prices ranging from $9.14
      to $17.50 have been issued under this plan at September 30, 1996.

      In November 1994, the Company reserved 250,000 shares for sale under the
      1994 Employee Stock Purchase Plan, designed to qualify under Internal
      Revenue Code Section 423(b). Stock may be offered for purchase by
      employees at a price equal to 85% of the lower of the market value of the
      stock at the beginning or end of each six-month offer period, subject to
      annual limitation. In fiscal 1996, 52,694 shares were issued under this
      Plan for net proceeds to the Company of $310,000. No shares had been
      issued under this Plan in fiscal 1995.

-13-
<PAGE>   33
9.    INCOME  TAXES

      The income before provision (benefit) for income taxes consists of the
following (in thousands):


<TABLE>
<CAPTION>
                                            YEARS ENDED SEPTEMBER 30,
                               ------------------------------------------------
                                 1996                1995                1994
                               --------            --------            --------

<S>                            <C>                 <C>                 <C>
Domestic                       $  5,639            $ 10,043            $  3,895
Foreign                          (1,152)               (822)               (534)
                               --------            --------            --------

Total                          $  4,487            $  9,221            $  3,361
                               ========            ========            ========
</TABLE>


      The provision (benefit) for income taxes consists of (in thousands):


<TABLE>
<CAPTION>
                                                  YEARS ENDED SEPTEMBER 30,
                                             -----------------------------------
                                              1996           1995          1994
                                             -------       -------       -------
<S>                                          <C>           <C>           <C>
Federal:
  Current                                    $ 1,253       $ 2,650       $    57
  Deferred                                       334        (3,200)           --
                                             -------       -------       -------
                                               1,587          (550)           57
State:
  Current                                         91           722            80
  Deferred                                        66          (704)           --
                                             -------       -------       -------

Provision (benefit) for income taxes         $ 1,744       $  (532)      $   137
                                             =======       =======       =======
</TABLE>


      A reconciliation between the Company's effective tax rate and the U.S.
      statutory rate is as follows (in thousands):


<TABLE>
<CAPTION>
                                                  YEARS ENDED SEPTEMBER 30,
                                            ------------------------------------
                                             1996           1995          1994
                                            -------       -------       -------

<S>                                         <C>           <C>           <C>
Tax at federal statutory rate               $ 1,570       $ 3,227       $ 1,313
State taxes                                      87           436            53
Foreign sales corporation benefit              (220)         (238)           --
Foreign losses not deductible                   403           177            --
Other                                           (28)           95            --
Tax impact of AG Israel transaction              --         2,136            --
Decrease in valuation allowance                 (68)       (6,365)       (1,229)
                                            -------       -------       -------

Provision (benefit) for income taxes        $ 1,744       $  (532)      $   137
                                            =======       =======       =======
</TABLE>


      The tax impact of the AG Israel transaction arises primarily from the
      transfer of technology, assets and liabilities of Rapro to AG Israel;
      preacquisition net operating loss carryforwards of Rapro were utilized as
      a result of this transaction.

-14-
<PAGE>   34
      The components of the net deferred tax assets as of September 30 were as
follows (in thousands):


<TABLE>
<CAPTION>
                                                                1996           1995
                                                               -------       -------
<S>                                                            <C>           <C>
Deferred tax assets:
  Net operating loss and credit carryforwards of Rapro         $ 1,408       $ 1,476
  Credit carryforwards                                             106            --
  Reserves not currently deductible for tax purposes             2,753         3,665
  Book depreciation over tax depreciation                          645           239
                                                               -------       -------

Gross deferred tax assets                                        4,912         5,380
Valuation allowance - Rapro net operating loss and credit
  carryforwards                                                 (1,408)       (1,476)
                                                               -------       -------

Net deferred tax assets                                        $ 3,504       $ 3,904
                                                               =======       =======
</TABLE>


      Realization of the tax benefit related to the Company's deferred tax
      assets is dependent upon the generation of future taxable income.
      Management has determined that recognition of its deferred tax assets is
      considered more likely than not at September 30, 1996, and therefore, has
      provided no valuation allowance. The valuation allowance at September 30,
      1995 of $1,476,000, which related to amounts arising from Rapro's
      preacquisition carryforwards, was reduced to $1,408,000 in 1996 due to
      utilization of $68,000 of these carryforwards. The credit carryforwards
      expire in 2006.

10.   EMPLOYEE BENEFIT PLAN

      The Company has a 401(k) tax-deferred savings plan under which
      participants may contribute up to 15% of their compensation, subject to
      certain Internal Revenue Service limitations. The Company has not
      contributed to the Plan to date.

11.   SIGNIFICANT CUSTOMERS AND RELATED PARTY TRANSACTIONS

      The Company leased a facility during fiscal years 1996, 1995 and 1994 from
      a shareholder. Rent expense related to this lease for 1996, 1995 and 1994
      was $72,000, $396,000 and $446,000, respectively.

      Sales and accounts receivable related to significant customers were:


<TABLE>
<CAPTION>
                                                     SALES AS A PERCENTAGE
                                   ACCOUNTS              OF NET REVENUES
                                  RECEIVABLE               YEARS ENDED
                                 SEPTEMBER 30,            SEPTEMBER 30,
                                --------------     ------------------------
                                1996      1995     1996       1995     1994
                                ----      ----     ----       ----     ----

<S>                             <C>      <C>       <C>       <C>       <C>
Distributor/shareholder           *       25%       25%       15%       13%
Distributor                      37%      10        14         *        15
Intel                             *       37        20        29         *
NEC                               *        *        17         *         *
IBM                               *       13         *        12         *
</TABLE>

*  Less than 10% of net revenues or accounts receivable

-15-
<PAGE>   35
12. GEOGRAPHIC AND CUSTOMER INFORMATION

      Information concerning the Company's operations by geographic area as of
      and for the three years ended September 30, 1996 follows (in thousands).
      Interregion transfers and eliminations represent transfers between AG
      Israel for the periods in which it was consolidated through May 31, 1995
      and domestic operations and are based on prices that approximate selling
      prices to foreign distributors.


<TABLE>
<CAPTION>
                                                        YEAR ENDED SEPTEMBER 30,
                                                --------------------------------------
                                                  1996           1995           1994
                                                --------       --------       --------
<S>                                             <C>            <C>            <C>
Net sales:
  From the United States to:
    United States                               $ 32,460       $ 42,882       $ 21,018
    Japan                                         19,263          9,132          5,321
    Europe                                        10,108          3,078          6,629
    Taiwan                                         7,044          7,134          4,830
    Other Far East countries                       2,214            274          1,968
    Other                                           --              225            485
  From Middle East (interregion transfers)          --             --              637
  Eliminations                                      --             --             (637)
                                                --------       --------       --------
                                                $ 71,089       $ 62,725       $ 40,251
                                                ========       ========       ========
Operating income (loss):
  United States                                                $ 10,319       $  5,133
  Middle East                                                      (746)          (497)
  Eliminations                                                     --             (171)
                                                               --------       --------

                                                               $  9,573       $  4,465
                                                               ========       ========

Identifiable assets:
  United States                                                                $13,586
  Middle East                                                                    1,294
  Eliminations                                                                    (204)
                                                                              --------
           Total assets                                                        $14,676
                                                                              ========
</TABLE>


      Export revenues as a percentage of net revenues were 54%, 32% and 48% in
      1996, 1995 and 1994, respectively.

13.   AG ISRAEL

      In 1992, the Company established AG Israel for the purpose of developing,
      manufacturing and marketing platforms for moving and controlling silicon
      wafers for the semiconductor industry. During fiscal 1993, the Company
      sold an approximate 49.9% interest in AG Israel to Hapoalim Investment Co.
      and Yozma Venture Capital (Yozma). The Company retained a 50.1% voting
      interest. Hapoalim Investment Co. and Yozma had the right to convert all
      of their interests in AG Israel to shares of the Company's common stock.
      Accordingly, the Company had recognized 100% of AG Israel's losses since
      its inception.

-16-
<PAGE>   36
      In April 1994, the Company obtained the right to induce conversion of this
      minority interest at any time. In return, Hapoalim Investment Co.
      purchased the shares held by Yozma and the Company revised the exchange
      rate at which Hapoalim Investment Co. could exchange its interest in AG
      Israel from $9.20 to $7.36 per share, and also revised the conversion rate
      of the debentures from $9.20 to $7.36. The Company also modified the terms
      of the warrant held by Hapoalim Investment Co., decreasing the exercise
      price to the lower of $9.15 or 80% of the price of the shares in an
      initial public offering. The fair value at April 1994 of these revisions
      to the exchange rate, conversion rate and warrant price were estimated to
      be $400,000 and was included in other expense.

      In February 1995, the Company exercised its exchange right and issued
      271,739 shares of common stock to acquire all of the outstanding shares of
      AG Israel. Also, in February 1995, the Company entered into an agreement
      for the sale of the controlling interest in the research, development and
      other business operations of its Rapro and AG Israel operations. Under the
      agreement, effective upon the close of the Company's initial public
      offering in May 1995, the Company contributed rights to the chemical vapor
      deposition (CVD) and cluster tool technologies, certain assets and
      liabilities of Rapro and cash of $500,000 to AG Israel. AG Israel issued
      stock equal to a 51% interest to Clal Electronics Industries Ltd. (Clal
      Electronics) in exchange for $2,500,000. In addition, Clal Electronics had
      agreed to permit reimbursement to the Company for advances made to AG
      Israel subsequent to September 30, 1994 through the closing of this
      transaction in May 1995; such reimbursements totaled $521,000. AG Israel
      is devoting its principal efforts to the development of cluster tools
      using the technologies received from the Company; the Company and Clal
      Electronics paid AG Israel an additional $1,000,000 and $2,000,000,
      respectively, under the agreement. The Company has a right for a five-year
      period to repurchase Clal Electronics interest in AG Israel and to
      terminate the joint ownership of the technology for a repurchase price
      equal to 100% of amounts contributed to AG Israel by Clal Electronics plus
      simple interest at 25% of such contributions for each year from the date
      the contribution was made, plus, under certain circumstances, $500,000.
      The Company also entered into a voting agreement with Clal Electronics
      that covers, among other items, rights to elect directors of AG Israel and
      rights of each of the parties to acquire additional shares of AG Israel.

      Pursuant to the terms of the agreement, Clal Electronics acquired
      approximately 544,000 shares (9.9%) of the Company's outstanding shares of
      common stock from existing shareholders of the Company. After three years,
      Clal Electronics may increase its ownership in the Company up to 12% and,
      if its ownership exceeds 10%, Clal Electronics has the right to nominate a
      member for election to the Company's Board of Directors.

      As a result of AG Israel's stock sale, the Company has accounted for its
      49% investment in AG Israel using the equity method since June 1, 1995.
      Results of operations of AG Israel and Rapro prior to June 1, 1995 have
      been included in the consolidated statement of operations. These
      operations had combined net sales of $339,000 and $1,124,000 and a net
      loss of $822,000 and $972,000 for the eight months ended May 31, 1995 and
      in fiscal 1994, respectively.

      Condensed summary financial information (unaudited) of AG Israel as of and
for the year ended September 30, 1996 is as follows (in thousands):


Current assets                                                       $5,127
Total assets                                                         $7,098
Current liabilities                                                  $3,677
Noncurrent liabilities                                               $  533

Net sales                                                            $2,997
Total expenses                                                        5,522

Net loss                                                             $2,525

-17-
<PAGE>   37
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

    The information required by this Item is incorporated by reference to
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" under Item 7, above.



PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

    The information concerning the Company's directors required by this Item is
incorporated by reference to the Company's definitive Proxy Statement for its
1997 Annual Meeting of Shareholders (the "Proxy Statement") under the heading
"Election of Directors." The information concerning the Company's executive
officers required by this Item is incorporated by reference to the Proxy
Statement under the heading "Executive Officers."

ITEM 11.  EXECUTIVE COMPENSATION

    The information required by this Item is incorporated by reference to the
Proxy Statement under the heading "Executive Compensation."


ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

    The information required by this Item is incorporated by reference to the
Proxy Statement under the heading "Security Ownership of Certain Beneficial
Owners and Management."


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

    The information required by this Item is incorporated by reference to the
Proxy Statement under the heading "Certain Relationships and Related
Transactions."



PART IV

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

         (a)  (1)  Financial Statements: See Index to Financial Statements, page
                   20.
              (2)  Financial Statement Schedules: See Index to Financial
                   Statement Schedules, page 20.
              (3)  Exhibits: See Index to Exhibits, pages 21-22.

         (b) No reports on Form 8-K were filed during the quarter ended
September 30, 1996.


                                       19
<PAGE>   38
                                   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 in the City of San
Jose, State of California, on the 16th day of December, 1996.


                             AG ASSOCIATES, INC.


                             By: /s/ DENNIS V. FAVERO 
                                ----------------------------------------------
                             Vice President, Finance & Chief Financial Officer
                             (Duly Authorized and Principal Financial and
                             Accounting Officer)

         Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
             Signatures                              Title                                     Date
             ----------                              -----                                     ----

<S>                                     <C>                                               <C>
        /s/ ARNON GAT                   Director, Chairman of the Board and               December 16, 1996
   ------------------------------       Chief Executive Officer (Principal            
          Arnon Gat, Ph.D.              Executive Officer)
                                        


           /s/ ANITA GAT                Director, Vice President Administration           December 16, 1996
    -----------------------------       and Secretary
              Anita Gat                 


        /s/ NORIO KURODA                Director                                          December 16, 1996
    -----------------------------
            Norio Kuroda

   
         /s/ JOHN MOORE                 Director                                          December 16, 1996
    ------------------------------
             John Moore


        /s/ CECIL PARKER                Director                                          December 16, 1996
     -----------------------------
            Cecil Parker
</TABLE>


                                       20
<PAGE>   39
                               AG ASSOCIATES, INC.

                          INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                                 Page(s) in
                                                                                                 Consolidated
                                                                                                 Financial
                                                                                                 Statements
                                                                                                 ------------
<S>                                                                                              <C>
Independent Auditors' Reports                                                                         1-2
Consolidated Balance Sheets - September 30, 1996 and 1995                                              3
Consolidated Income Statements - Years Ended September 30, 1996, 1995 and 1994                         4
Consolidated Statements of Shareholders' Equity (Deficiency) - Years Ended September 30, 1996,         5
   1995 and 1994
Consolidated Statements of Cash Flows - Years Ended September 30, 1996, 1995 and 1994                 6-7
Notes to Consolidated Financial Statements                                                            8-17


                     INDEX TO FINANCIAL STATEMENT SCHEDULES

                                                                                                       Page
                                                                                                       ----
Schedule II Valuation and Qualifying Accounts                                                           24
Report of Independent Auditors on Financial Statement Schedule                                          25
</TABLE>

                                                                 21
<PAGE>   40
                               AG ASSOCIATES, INC.

                                INDEX TO EXHIBITS

EXHIBIT
NUMBER                                    EXHIBITS                      PAGE NO.
------                                    --------                      --------

3.01(1)           Registrant's Amended and Restated Articles of
                  Incorporation
3.02(1)           Certificates of Amendment to Registrant's Articles
                  of Incorporation
3.03(1)           Form of Registrant's Amended and Restated Articles
                  of Incorporation filed upon closing of initial
                  public offering
3.04(1)           Registrant's Amended and Restated Bylaws
4.01(1)           Form of Specimen Certificate for Registrant's Common
                  Stock
10.01(1)          Registrant's 1982 Stock Option Plan, as amended, and
                  forms of related documents
10.02(2)          Registrant's 1993 Stock Option Plan and related
                  documents
10.03(1)          Registrant's 1994 Directors Stock Option Plan and
                  related documents
10.04(1)          Registrant's 1994 Employee Stock Purchase Plan
10.05(1)          Form of Indemnification Agreement entered into by
                  Registrant with each of its directors and executive
                  officers
10.06(1)          Separation Agreement, dated September 30, 1994, by
                  and between Registrant and Mickey Margalit
10.07(1)          Letter Agreement with David Yoffie, dated February
                  23, 1995
10.08(1)          Lease Agreement, dated June 4, 1985, by and between
                  Registrant and Menlo Caspian Investment Company,
                  including amendments one and two thereto, all
                  related letter agreements and a related stock
                  purchase agreement
10.09(1)          Lease Agreement, dated August 11, 1994, by and
                  between Registrant and RREEF USA FUND-II Inc.
10.10(1)          Line of Credit Agreement by and between Registrant
                  and the Fuji Bank, Ltd. dated February 28, 1992, and
                  all modifications and extensions relating thereto
10.11(1)          Contract by and between Registrant, AG Associates
                  (Israel) Limited and Investment Company of Bank of
                  Hapoalim, Ltd. dated January 8, 1993, as amended
10.12(1)          Form of Convertible Debenture issued by Registrant
                  to Investment Company of Bank Hapoalim on January 8,
                  1993 and February 21, 1993
10.13(1)          Security Agreement, dated January 8, 1993 by and
                  between Registrant and Investment Company of Bank
                  Hapoalim
10.14(1)          Investment Representation Letter, dated February 21,
                  1995, from Investment Company of Bank Hapoalim, Ltd.
                  to Registrant
10.15(1)          Registration Rights Agreement, dated February 26,
                  1995, by and among Investment Company of Bank
                  Hapoalim, Clal Electronics Industries, Ltd. and
                  Registrant
10.16(1)          Voting Agreement, dated February 26, 1995, by and
                  among Registrant, Investment Company of Bank
                  Hapoalim, Arnon Gat and Anita Gat
10.17(1)          International Distributor Agreement, dated December
                  10, 1993, by and between Registrant's wholly owned
                  subsidiary, AG Associates Foreign Sales, Inc. and
                  MSA Metron Semiconductors Asia Ltd
10.18(1)          International Distributor Agreement, dated February
                  1, 1994, by and between AG Associates Foreign Sales,
                  Inc. and MSE Metron Semiconductors Europa B.V.
10.19(1)          International Distributor Agreement, dated December
                  12, 1985, by and between AG Associates Foreign
                  Sales, Inc. and Canon Sales Co., Inc as amended
10.20(1)          Stock Purchase Agreement, dated July 28, 1989, by
                  and among Registrant, Canon a Sales Co., Inc. and
                  Nippon Typewriter Corporation

                                       22
<PAGE>   41
EXHIBIT
NUMBER                                  EXHIBITS                        PAGE NO.
------                                  --------                        --------

10.21(1)          Stock Purchase Agreement, dated August 30, 1989, by
                  and between Registrant and Appex Corporation
10.22(1)          Technology Transfer and License Agreement by and
                  between Registrant and Canon Sales Co., Inc. dated
                  July 28, 1989, as amended
10.23(1)          Improvement License Agreement, dated March 14, 1994,
                  by and between Registrant and Canon Sales Co., Inc.
10.24(1)          Purchase Agreement, dated June 23, 1993, by and
                  between Registrant and Equipe
10.25(1)          Technologies Letter Agreement between Fuji Bank,
                  Limited and Registrant, dated April 11, 1995
10.26(1)          Agreement, dated February 27, 1995, by and among,
                  Registrant, Clal Electronics Industries Ltd., AG
                  Associates (Israel) Ltd., Arnon Gat, Anita Gat and
                  Rapro Technology Inc.
10.27(1)          Amendments and PreClosing Agreement among the
                  parties to the Agreement filed as Exhibit 10.26 to
                  the Registration Statement, dated April 13, 1995,
                  April 18, 1995, April 20, 1995, and April 24, 1995,
                  respectively
10.28(1)          Amendment to Convertible Debentures, dated April 25,
                  1995, between Investment Company of Bank Hapoalim
                  and Registrant
10.29(3)          Lease Agreement, dated July 21, 1995, by and between
                  Registrant and South Bay/Fortran, including
                  amendment one, dated October 6, 1995
10.30(3)          Separation Agreement, dated November 8, 1995, by and
                  between Registrant and David Yoffie
10.31(3)          Letter Agreement and Promissory Note with Julio L.
                  Guardado, dated July 20, 1995
10.32(3)          Letter Agreement with Susan Salvesen, dated December
                  6, 1995
10.33(4)          Executive Bonus Plan
10.34(4)          Transition Services Agreement, dated as of March 25,
                  1996, by and between Registrant, AG Israel and AGI,
                  Inc.
10.35(4)          Sublease, for reference purposes only, dated August
                  20, 1996, by and between Registrant, AGI, Inc. and
                  AG Israel
10.36(4)          Separation Agreement, dated July 29, 1996, by and
                  between Registrant and Patrick B. Halahan
10.37(4)          Separation Agreement, dated July 29, 1996, by and
                  between Registrant and Ronald G. Manley
10.38(4)          Loan Agreement, dated August 2, 1996, by and between
                  Registrant and Silicon Valley Bank
11.01(4)          Computation of Earnings Per Share
23.02(4)          Consent of Deloitte & Touche LLP, Independent
                  Auditors
23.04(4)          Consent of Kesselman & Kesselman, Independent
                  Auditors
27.00(4)          Financial Data Schedule
------------------
(1)  Incorporated by reference to the Registrant's Registration Statement on
     Form S-1 (File No. 33-90382) filed with and declared effective by the
     Securities and Exchange Commission on May 15, 1995.

(2)  Incorporated by reference to the Registrant's Registration Statement on
     Form S-8 (File No. 333-02360) filed with and declared effective by the
     Securities and Exchange Commission on March 14, 1996.

(3)  Incorporated by reference to the Registrant's Annual Report on Form 10-K
     for the Fiscal Year Ended September 30, 1995.

(4)  Filed herewith.

                                       23
<PAGE>   42
                               AG ASSOCIATES, INC.

                                   SCHEDULE II
                        VALUATION AND QUALIFYING ACCOUNTS
                                 (in thousands)

<TABLE>
<CAPTION>
                                                Charged    Charged
                                  Balance at    to Costs   to Other                    Balance at
                                  Beginning       and      Accounts-                      End
         Description              of Period     Expenses   Describe    Deductions      of Period
-----------------------------     ---------     --------   --------    ----------      ---------
<S>                                 <C>          <C>          <C>      <C>               <C>   
ALLOWANCE FOR DOUBTFUL
     ACCOUNTS

Year Ended September 30, 1996       $1,456       $    0       $0       $  553  (1)       $  903

Year Ended September 30, 1995          534        1,161        0          239  (1)        1,456

Year Ended September 30, 1994          310          355        0          131  (1)          534

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

INVENTORY RESERVES

Year Ended September 30, 1996       $2,669       $1,385       $0       $  765  (4)       $3,289

Year Ended September 30, 1995        1,517        2,304        0        1,152  (4)        2,669

Year Ended September 30, 1994        2,330          353        0        1,166  (4)        1,517

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

WARRANTY RESERVES

Year Ended September 30, 1996       $2,651       $3,713       $0       $3,924  (3)       $2,440

Year Ended September 30, 1995        2,313        3,420        0        3,082  (2)        2,651

Year Ended September 30, 1994        1,796        1,661        0        1,144  (3)        2,313
</TABLE>

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

(1) Represents writeoffs of uncollectible accounts

(2) $2,832 represents actual warranty expense incurred, $250 represents transfer
    to AG Associates (Israel), Ltd.

(3) Represents actual warranty expense incurred

(4) Represents write offs of inventories




                                       24
<PAGE>   43
INDEPENDENT AUDITORS' REPORT ON SCHEDULE

We have audited the consolidated financial statements of AG Associates, Inc. as
of September 30, 1996 and 1995 and for each of the three years in the period
ended September 30, 1996 and have issued our report thereon dated October 25,
1996; such financial statements and report are included in this 1996 Annual
Report on Form 10-K. Our audits also included the financial statement schedule
of AG Associates, Inc., listed in Item 14(a)2. Such financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion based on our audits. In our opinion, such financial
statements schedule, when considered in relation to the basic financial
statements takes as a whole, presents fairly in all material respects the
information set forth therein.

DELOITTE & TOUCHE LLP

San Jose, California
October 25, 1996



                                       25