<PAGE>   1

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

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

                                    FORM 10-Q

(Mark One)

   [X]     Quarterly Report Pursuant to Section 13 or 15(d) of the    
           Securities Exchange Act of 1934.


                  For the quarterly period ended March 31, 1998

                                       or

   [ ]     Transition Report Pursuant to Section 13 or 15(d) of the 
           Securities Exchange Act of 1934.

                 For the transition period from ______to ______

                         Commission file number: 0-25862


                               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: (408) 935-2000


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 [ ]


The number of shares outstanding of the Registrant's Common Stock, no par value,
was 6,126,136 at April 30, 1998.



<PAGE>   2

                               AG ASSOCIATES, INC.


INDEX

<TABLE>
<CAPTION>
                        Description                                               Page Number
-------------------------------------------------------------------------         -----------
<S>                                                                               <C>
Part I: Financial Information

     Item 1:Financial Statements

           Condensed Consolidated Statements of Operations for the

               Three and Six Month Periods Ended March 31, 1998 and 1997               3

           Condensed Consolidated Balance Sheets as of  March 31, 1998
               and   September 30, 1997                                                4

           Condensed Consolidated Statements of Cash Flows for the Six
               Month Periods Ended March 31, 1998 and 1997                             5

           Notes to Condensed Consolidated Financial Statements                        6

     Item 2:Management's Discussion and Analysis of Financial Condition
            and Results of Operations                                                  8

     Item 3:Quantitative and Qualitative Disclosure About Market Risk                 14

Part II:    Other Information

     Item 1:Legal Proceedings                                                         15

     Item 2:Changes in Securities and Use of Proceeds                                 15

     Item 3:Defaults Upon Senior Securities                                           15

     Item 4:Submission of Matters to a Vote of Security Holders                       15

     Item 5:Other Information                                                         16

     Item 6:Exhibits and Reports on Form 8-K                                          16

Signature                                                                             17
</TABLE>



                                      -2-
<PAGE>   3

                              AG ASSOCIATES, INC.

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                    Three Months Ended March 31,  Six Months Ended March 31,
                                                    ---------------------------   -------------------------
                                                        1998          1997          1998          1997
                                                       -------       -------       -------       -------
<S>                                                    <C>           <C>           <C>           <C>    
Net sales                                              $12,569       $11,140       $29,002       $20,273
                                                       -------       -------       -------       -------
Cost of sales                                            8,889         9,329        19,074        15,063
                                                       -------       -------       -------       -------

    Gross profit                                         3,680         1,811         9,928         5,210

Operating expenses:
    Research and development                             3,787         2,850         7,735         6,027
    Selling, general and administrative                  2,145         1,994         4,506         4,084
                                                       -------       -------       -------       -------
Total operating expenses                                 5,932         4,844        12,241        10,111
                                                       -------       -------       -------       -------
Income (loss) from operations                           (2,252)       (3,033)       (2,313)       (4,901)
    Interest income (expense), net                          22            84            66           187
    Other income, net                                       22            26            54            63
                                                       -------       -------       -------       -------
Income (loss) before income taxes                       (2,208)       (2,923)       (2,193)       (4,651)
Provision (benefit) for income taxes                         0          (731)            6        (1,163)

Net income (loss)                                      ($2,208)      ($2,192)      ($2,199)      ($3,488)
                                                       =======       =======       =======       ======= 

Basic net income (loss) per share                       ($0.36)       ($0.37)       ($0.36)       ($0.59)
Diluted net income (loss) per share                     ($0.36)       ($0.37)       ($0.36)       ($0.59)
Shares used in basic per share computations              6,074         5,953         6,069         5,957
Shares used in diluted per share computations            6,074         5,953         6,069         5,957
</TABLE>


See Notes to Condensed Consolidated Financial Statements






                                      -3-
<PAGE>   4

                              AG ASSOCIATES, INC.

                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                   March 31,       September 30,
                                                                      1998              1997
                                                                 ------------      -------------  
                                                                  (unaudited)           (*)
<S>                                                                 <C>                  <C>    
ASSETS

Current assets:
    Cash and equivalents                                            $    84              $ 2,485
    Short-term investments                                            1,014                1,672
    Accounts receivable, net                                         10,618               13,415
    Inventories                                                      13,880               11,676
    Income taxes refundable                                             155                1,652
    Deferred tax assets                                               2,215                2,221
    Prepaid expenses and other current assets                         1,256                  896
                                                                    -------              -------
       Total current assets                                          29,222               34,017

Property and equipment, net                                           9,507                8,493
Deferred tax assets                                                     437                  437
                                                                    -------              -------
       Total assets                                                 $39,166              $42,947
                                                                    =======              =======

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
    Accounts payable                                                 $5,618               $6,272
    Accrued liabilities                                               2,378                2,997
    Product warranty reserves                                         1,255                1,687
    Current portion of capital lease obligations                        184                  194
                                                                    -------              -------
       Total current liabilities                                      9,435               11,150

Capital lease obligations                                               193                  275

Contingencies (Note 4)

Shareholders' equity:
    Common stock                                                     36,347               36,139
    Net unrealized loss on short-term investments                        (3)                 (10)
    Accumulated deficit                                              (6,806)              (4,607)
                                                                    -------              -------
       Total shareholders' equity                                    29,538               31,522
                                                                    -------              -------
         Total liabilities and shareholders' equity                 $39,166              $42,947
                                                                    =======              =======
</TABLE>
----------
(*)  Derived from audited financial statements.






See Notes to Condensed Consolidated Financial Statements.



                                      -4-
<PAGE>   5

                              AG ASSOCIATES, INC.

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                           (IN THOUSANDS -- UNAUDITED)

<TABLE>
<CAPTION>
                                                               Six Months Ended March 31,
                                                               --------------------------
                                                                 1998              1997
                                                               ---------        ---------
<S>                                                            <C>                <C>     
Cash flows from operating activities:

    Net loss                                                   ($2,199)           ($3,488)
    Reconciliation to net cash provided by (used in)
       operating activities:
       Depreciation and amortization                             1,325              1,364
       Deferred income taxes                                         6             (1,163)
       Changes in assets and liabilities:
          Accounts receivable                                    2,797               (321)
          Inventories                                           (2,204)             3,026
          Prepaid expenses and other current assets               (360)              (247)
          Accounts payable                                        (654)              (859)
          Accrued liabilities and warranty reserves             (1,050)            (1,301)
          Income taxes payable                                   1,497                 --
                                                               -------            ------- 
             Net cash provided by (used in) operating             (842)            (2,989)
             activities

Cash flows from investing activities:
    Purchases of short-term investments                           (309)            (6,281)
    Maturities of short-term investments                           971              9,916
    Capital expenditures                                        (2,338)            (1,498)
                                                               -------            ------- 
             Net cash provided by (used in) investing           (1,676)             2,137
             activities

Cash flows from financing activities:
    Repayment of capital lease obligations                         (91)              (143)
    Employee stock transactions                                    208                 50
                                                               -------            ------- 
             Net cash provided by (used in) financing              117                (93)
             activities

                                                               -------            ------- 
Net decrease in cash and equivalents                            (2,401)              (945)

Cash and equivalents at beginning of period                      2,485              1,996

                                                               =======            ======= 
Cash and equivalents at end of period                              $84             $1,051
                                                               =======            ======= 

Supplemental disclosure of cash flow information 
Cash paid during the period for:
       Interest                                                    $20                 52
                                                               =======            ======= 
       Income taxes                                                 $0                 $0
                                                               =======            ======= 
</TABLE>






See Notes to Condensed Consolidated Financial Statements.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



                                      -5-
<PAGE>   6

                              AG ASSOCIATES, INC.

March 31, 1998
(Unaudited)

NOTE 1 - Basis of Presentation

The financial statements have been prepared by AG Associates, Inc. (the
"Company") pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC"). While the quarterly financial information contained in this
filing is unaudited, the financial statements presented reflect all normal
recurring adjustments which the Company considers necessary for a fair
presentation of the financial position, results of operations and cash flows for
all interim periods presented. The results for interim periods are not
necessarily indicative of the results to be expected for the entire year. The
information included in this report should be read in conjunction with the
Consolidated Financial Statements and notes thereto included in the Company's
1997 Annual Report on Form 10-K.


NOTE 2 -- Net Income Per Share Information

The Company has adopted Statement of Financial Accounting Standards No. 128,
"Earnings per Share" (SFAS 128). SFAS 128 requires a dual presentation of basic
and diluted earnings per share ("EPS"). Basic EPS excludes dilution and is
computed by dividing net income (loss) by the weighted average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue stock were exercised
or converted into common stock. Prior period amounts are the same under SFAS 128
as previously reported.

<TABLE>
<CAPTION>
                                        Three months ended March 31,       Six months ended March 31,
                                        ----------------------------       --------------------------
                                               1998            1997             1998           1997
                                             -------         -------          -------        -------
<S>                                          <C>             <C>              <C>            <C>     
Net loss                                     ($2,206)        ($2,190)         ($2,199)       ($3,484)
                                             =======         =======          =======        =======
Share used in calculation:

   Weighted average common shares              6,074           5,953            6,069          5,957
   outstanding used in calculation of
   basic net loss per share

Dilutive effect of stock options                   0               0                0              0
                                             -------         -------          -------        -------
Shares  used in  calculation  of diluted       6,074           5,953            6,069          5,957
net loss per share
                                             =======         =======          =======        =======
Basic net loss per share                      ($0.36)         ($0.37)          ($0.36)        ($0.59)
                                             =======         =======          =======        ======= 
Diluted net loss per share                    ($0.36)         ($0.37)          ($0.36)        ($0.59)
                                             =======         =======          =======        ======= 
</TABLE>



For the three and six month periods ending March 31, 1998, options to purchase
902,457 shares of common stock at prices ranging from $4.38 to $16.82, and
options to purchase 852,887 shares of common stock at prices ranging from $5.00
to $16.71, respectively, were outstanding but not included in the calculation of
diluted net loss per share. For the three and six month period ending March 31,
1997, options to purchase 505,538 shares of common stock at prices ranging from
$5.81 to $16.82, and options to purchase 503,023 shares of common stock at
prices ranging from $6.00 to $16.82, respectively, were outstanding but not
included in the calculation of diluted net loss per share. In accord with SFAS
128, these shares were not included because the option's exercise price was
greater than the average market price of the common shares for the period and
would therefore be anti-dilutive.



                                      -6-
<PAGE>   7

                               AG ASSOCIATES, INC.


NOTE 3 -- Inventories

Inventories, valued at the lower of cost (first-in, first-out) or market,
consist of:

<TABLE>
<CAPTION>
                                                  (in thousands)
                                           March 31,        September 30,
                                             1998              1997
                                           ---------       -------------
<S>                                         <C>               <C>   
               Raw materials                $8,044            $7,500
               Work-in-progress              5,836             4,176
                                           -------           -------
               Total                       $13,880           $11,676
                                           =======           =======
</TABLE>


Inventories are shown net of reserves for obsolete, slow-moving and non-salable
inventory of $3,435,000 and $3,666,000 at March 31, 1998 and September 30, 1997,
respectively.


NOTE 4 -- Litigation

The Company is currently involved in an intellectual property litigation. On
April 24, 1997, Applied Materials filed a complaint against the Company, AST
Elektronik GmbH and AST Elektronik U.S.A. (collectively, "AST") in the United
States District Court for the Northern District of California, San Jose
Division, Case No. CV97-20375 RMW. Applied Materials subsequently amended its
complaint. Applied Materials currently alleges that the Company's products
infringe on four Applied Materials patents relating to Rapid Thermal Processing
("RTP") processes and heater head design and seeks a permanent injunction
against infringement, an award of damages for infringement, treble damages for
intentional and willful infringement, attorneys' fees and costs of suit. On July
23, 1997, the Company answered Applied Materials' complaint and counterclaimed
for declaratory relief that the Company's products do not infringe the patents
and that the patents are invalid. On October 3, 1997, the Company filed a
counterclaim in the United States District Court for Northern California, San
Jose Division against Applied Materials for infringement of one of the Company's
RTP process patents. On October 27, 1997, Applied Materials answered the
counterclaim by alleging that it does not infringe the Company's patent and that
the patent is invalid. The Company subsequently amended its complaint to assert
that Applied Materials infringed three additional patents. Applied Material has
moved to dismiss these claims. The trial is set for March 1, 1999. Management
believes Applied Materials' claims are without merit and intends to defend the
Company vigorously, and that the Company's claims against Applied are
meritorious. However, there can be no assurance that this litigation will be
resolved in favor of the Company, and, in any event, litigation could result in
significant expense to the Company and could divert the efforts of the Company's
technical and management personnel from other tasks, whether or not such
litigation is determined in favor of the Company. In particular, the Company
expects to incur increased legal expenses in fiscal 1998 and fiscal 1999. 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.



                                      -7-
<PAGE>   8

                              AG ASSOCIATES, INC.


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS

The discussion set forth in this Form 10-Q, contains 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. These
forward-looking statements are subject to significant risks and uncertainties,
including those identified in the section labeled "Factors That May Affect
Future Results" and in the Company's Annual Report on Form 10-K for the fiscal
year ended September 30, 1997, that may cause actual results to differ
materially from those discussed in such forward-looking statements. The Company
has identified with a preceding asterisk ("*") various sentences within this
Form 10-Q which contain such forward-looking statements, and words such as
"believes," "anticipates," "expects," "future," "intends" and similar
expressions are also intended to identify such forward-looking statements. In
addition, the section labeled "Factors That May Affect Future Results," which
has no asterisks for improved readability, consists primarily of forward-looking
statements. The Company undertakes no obligation to publicly release the results
of any revisions to these forward-looking statements which may be made to
reflect events or circumstances occurring after the date hereof. Readers are
urged to carefully review and consider the various disclosures made by the
Company in this report and in the Company's other reports filed with the SEC,
including its Form 10-K, that attempt to advise interested parties of the risks
and factors that may affect the Company's business.


Factors That May Affect Future Results

The Company's business, financial condition and results of operations are
subject to the following risks.

     RAPID TECHNOLOGICAL CHANGE AND DEVELOPMENT RISKS. The Company derives
substantially all of its revenue from a single line of rapid thermal processing
products. The rapid thermal processing ("RTP") industry is subject to rapid
technological change, and the Company and its competitors continuously seek to
introduce new products that provide improved process results and manufacturing
performance at prices acceptable to RTP customers. There can be no assurance
that the Company can develop new products more quickly than its competitors or
that the Company's products will have better price/performance characteristics
than competitors' products. During the second quarter of fiscal 1998, the
Company shipped beta units of its new Starfire(R) 200mm and Starfire 300mm RTP
systems, which are intended to provide RTP capabilities for the 0.18 and 0.25
micron line widths previously unavailable from the Company's products. Initial
margins on the Starfire RTP systems are expected to be lower than current
Heatpulse production systems and there can be no assurance that the Starfire RTP
systems will achieve market acceptance, with the anticipated cost of ownership.

     SEMICONDUCTOR INDUSTRY VOLATILITY. The semiconductor industry has
historically been cyclical and subject to unexpected periodic downturns
associated with sudden changes in supply and demand. In fiscal 1997, the Company
had sequentially grown net sales from the semiconductor industry's downturn in
1996, however the current economic instability in Asia, which has had an effect
on the Company's backlog, will result in lower net sales for the third quarter
of fiscal 1998 compared to net sales in the first and second quarters of fiscal
1998. In addition, the Company's continuation of a high level of research and
development spending on its new products and competitive pressures will continue
to affect the Company's overall profitability. The Company cannot predict
industry cycles and their effect on the RTP market, rate of orders for the
Company's products or the degree to which the Company's new products will
achieve market acceptance. In particular, the semiconductor industry may
experience a prolonged downturn as a result of economic instability in Asia. For
these reasons, the Company's analysts' and investors' expectations with respect



                                      -8-
<PAGE>   9

                              AG ASSOCIATES, INC.


to the Company's new orders, net sales and operating results with respect to
future quarters may not be met.

     STOCK PRICE VOLATILITY. The Company's common stock price may be subject to
significant volatility. For any given quarter, a shortfall in the Company's
announced revenue or earnings from the levels expected by securities analysts or
investors 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 quarter or following the end of
the quarter. 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.

     COMPETITION. The Company's ability to compete depends upon the Company's
ability to develop new RTP product features that enhance uniformity and
repeatability, improve process capability and flexibility and reduce cost of
ownership. The Company's competitors, many of whom have substantially greater
resources than the Company, also seek to compete in these areas. In addition,
the Company expects to see increased competition from batch furnace vendors as
those companies increase functionality available in such machines. Applied
Materials, Inc. ("Applied Materials") has made significant gains in the
Company's market and had offered certain functionality the Company was not able
to provide with its products, allowing Applied Materials to capture significant
customers. Applied Materials and AST are significantly larger companies with
greater resources than the Company. There are also larger Japanese and domestic
companies that possess the technical resources to enter the RTP market.

     CLAIMS OF PATENT INFRINGEMENT. The Company is currently involved in an
intellectual property litigation. On April 24, 1997, Applied Materials filed a
complaint against the Company, AST Elektronik GmbH and AST Elektronik U.S.A.
(collectively, "AST") in the United States District Court for the Northern
District of California, San Jose Division, Case No. CV97-20375 RMW. Applied
Materials subsequently amended its complaint. Applied Materials currently
alleges that the Company's products infringe on four Applied Materials patents
relating to Rapid Thermal Processing ("RTP") processes and heater head design
and seeks a permanent injunction against infringement, an award of damages for
infringement, treble damages for intentional and willful infringement,
attorneys' fees and costs of suit. On July 23, 1997, the Company answered
Applied Materials' complaint and counterclaimed for declaratory relief that the
Company's products do not infringe the patents and that the patents are invalid.
On October 3, 1997, the Company filed a counterclaim in the United States
District Court for Northern California, San Jose Division against Applied
Materials for infringement of one of the Company's RTP process patents. On
October 27, 1997, Applied Materials answered the counterclaim by alleging that
it does not infringe the Company's patent and that the patent is invalid. The
Company subsequently amended its complaint to assert that Applied Materials
infringed three additional patents. Applied Material has moved to dismiss these
claims. The trial is set for March 1, 1999. Management believes Applied
Materials' claims are without merit and intends to defend the Company
vigorously, and that the Company's claims against Applied are meritorious.
However, there can be no assurance that this litigation will be resolved in
favor of the Company, and, in any event, litigation could result in significant
expense to the Company and could divert the efforts of the Company's technical
and management personnel from other tasks, whether or not such litigation is
determined in favor of the Company. In particular, the Company expects to incur
increased legal expenses in fiscal 1998 and fiscal 1999. 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.

     INVENTORY OBSOLESCENCE. Because the Company's industry is subject to rapid
technological change, the Company has experienced, and expects to experience,
obsolescence of 



                                      -9-
<PAGE>   10

                              AG ASSOCIATES, INC.


certain of its products as the Company and its competitors introduce new
products with improved price/performance characteristics. In particular, the
Company discontinued its Heatpulse(R) 4100 product line in the quarter ended
March 31, 1997 and consequently wrote down $1.4 million of inventory in that
quarter. During the quarter ended June 30, 1997, the Company, for the first time
in its history, booked more orders for its Heatpulse 8800 product line than its
Heatpulse 8100 product line and this trend has continued into the second quarter
of fiscal 1998. To the extent sales of new products do not offset, or generate
lower margins than sales of older products, the Company's business, results of
operation and financial condition would be materially adversely affected. In
addition, the Company believes that the Heatpulse 8100 product line will
ultimately become obsolete as acceptance of the Heatpulse 8800 and Starfire
products increases and the current market conditions persist.

    POTENTIAL FLUCTUATIONS IN OPERATING 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, the Company's ability to
manage costs during periods of low or negative earnings growth, the 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 expenses 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, the impact of the Company's
efforts to implement its evolving long-term strategy, the uncertainties of
ongoing negotiations and economic conditions generally or in various geographic
areas. 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 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 the quarter.

    EMPLOYEE RISK. Competition in recruiting personnel in the semiconductor
industry is intense. The Company believes that its future success will depend in
part on its ability to recruit and retain highly skilled management, marketing
and technical personnel. The Company believes it must provide personnel with a
competitive compensation package, which necessitates the continued availability
of stock options and requires ongoing shareholder approval of the Company's
stock compensation programs.

    YEAR 2000 INFRASTRUCTURE RISK. The Company is currently in the process of
working its information technology infrastructure for Year 2000 compliance. The
Company does not expect that the cost to modify its information technology
infrastructure to be Year 2000 compliant will be material to its financial
condition or results of operations. The Company does not anticipate any material
disruption in its operations as a result of any failure by the Company to be in
compliance. The Company is currently gathering information concerning the Year
2000 compliance status of its suppliers and customers. In the event that any of
the Company's significant suppliers or customers does not successfully and
timely achieve Year 2000 compliance, the Company's business or operations could
be adversely affected.



                                      -10-
<PAGE>   11

                              AG ASSOCIATES, INC.


Results of Operations

The following table sets forth items in the Company's Condensed Consolidated
Statements of Operations as a percentage of net sales for the periods indicated:

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
                                          Three Months Ended Mar 31,       Six Months Ended Mar 31,
                                          --------------------------       ------------------------
                                              1998        1997                1998        1997
                                              ----        ----                ----        ----
<S>                                           <C>         <C>                 <C>         <C> 
Net sales                                      100%        100%               100%        100%
Cost of sales                                   71          84                 66          74
                                              ----        ----               ----        ----
     Gross profit                               29          16                 34          26
Operating expenses:
     Research and development                   30          25                 27          30
     Selling, general and administrative        17          18                 16          20
                                              ----        ----               ----        ----
Total operating expenses                        47          43                 43          50
                                              ----        ----               ----        ----
Income (loss) from operations                  (18)        (27)                (9)
     Interest income (expense), net              *           1                  1           1
     Other income, net                           *           *                  *           *
                                              ----        ----               ----        ----
     Income (loss) before income taxes         (18)        (26)                (8)        (23)
Provision (benefit) for income taxes             0          (6)                 0          (6)
                                              ----        ----               ----        ----
Net income (loss)                              (18)%       (20)%               (8)        (17)%
                 --------------               ====        ====               ====        ====
                 & less than 1%
---------------------------------------------------------------------------------------------------
</TABLE>


Net Sales

Net sales for the three and six months ended March 31, 1998 were $12.6 and $29.0
million respectively, compared to $11.1 and $20.3 million for the same periods
in fiscal 1997, representing an increase of 13% and 43% respectively. The
increase in sales was due primarily to the increase in unit sales of the
Company's Heatpulse 8000 systems which the Company believes was attributable to
the semiconductor industry's brief recovery from the end of calendar 1996,
however the quarter ended March 31, 1998 represents a decline of 23% from the
preceding quarter. *Net sales in the third quarter of fiscal 1998 are expected
to decline as well, due to the current market conditions.

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 warranty and selling expenses. For
the three and six month periods ended March 31, 1998, Canon represented 36% and
32% of net sales and Metron represented 11% and 12% of net sales. For the same
period in the prior fiscal year, Canon represented 13% and 15% of net sales and
Metron represented 9% of net sales for both periods. International sales as a
percentage of net sales increased for the three and six month periods ended
March 31, 1998 to 50% and 48% respectively. International sales as a percentage
of net sales for the same periods last fiscal year were 33% and 32%
respectively. The increase in the percentage of the Company's net sales
represented by Canon, Metron, and international customers is due to stronger
business in Japan and Europe. *Based upon the geographic locations of
semiconductor manufacturers, the Company anticipates that international sales in
general will continue to account for a significant portion of net sales in
fiscal 1998. *However, international sales as a percentage of net sales will
vary on a quarterly basis depending on the timing of orders and the relative
strength of the Asian economies. See "Factors That May Affect Future Results -
Potential Fluctuations in Operating Results."

Two end-user customers represented 23% and 10% of net sales in the three months
ended March 31, 1998, compared to these customers representing 37% and 6% for
the same period last fiscal year. For 



                                     -11-
<PAGE>   12

                              AG ASSOCIATES, INC.


the six months ended March 31, 1998 the two end-user customers represented 19%
and 5% compared to 35% and 6% of net sales for the same period in the last
fiscal year. *The Company expects a significant portion of its future sales to
remain concentrated within a limited number of strategic customers. *The Company
expects increasing competition from Applied Materials, a competitor who has
substantially greater resources than the Company, particularly in the sale of
RTP systems designed for 0.25 micron line width applications and the emerging
0.18 micron line width applications. In addition, the Company has experienced,
and continues to experience, competition from other RTP equipment suppliers.
*These competitors' impact on future sales cannot be estimated. *As a result of
competitive pressures, there can be no assurance that the Company will be able
to retain its strategic customers or that such customers will not cancel,
reschedule or significantly reduce the volume of orders or, in the event orders
are canceled, that such orders will be replaced by other sales. See "Factors
That May Affect Future Results - Competition."

Gross Profit

Gross profit for the three and six month periods ended March 31, 1998 were $3.7
and $9.9 million respectively, compared to a gross profit of $1.8 and $5.2
million for the same period in fiscal 1997. Gross profit as a percentage of net
sales for the three and six month periods ended March 31, 1998 increased to 29%
and 34% respectively, compared to 16% and 26% for the three and six month
periods ended March 31, 1997. The increase in gross margin for the three and six
month periods ended March 31, 1998 compared to the same periods in fiscal 1997
was primarily attributable to a non-cash inventory write-down of $1.4 million
which occurred in the second quarter of fiscal 1997, related to excess inventory
associated with the discontinuance of the Heatpulse 4100 product line. No
similar entry was recorded in either the first or second quarter of fiscal 1998.
Gross margin in the three and six month periods ended March 31, 1998 compared to
the same periods in the prior fiscal year, was also favorably impacted by the
increase in revenue over the same period, resulting in the Company's fixed
manufacturing costs being spread over increased units, and the cost reduction
program the Company has put into place in fiscal 1997. *The Company expects
increased competition and market conditions to lower gross margin in the third
quarter of fiscal 1998, which would have an immediate adverse effect on the
Company's business and results of operations.

Research and Development Expenses

Research and development ("R&D") expenses were $3.8 and $7.7 million for the
three and six month periods ended March 31, 1998, representing an increase of
$0.9 million (33%) and $1.7 million (28%) respectively, when compared with the
same periods in fiscal 1997. As a percentage of net sales, R&D expenses were 30%
and 27% for the three and six month periods ended March 31, 1998 from 25% and
30% for the comparable periods in the prior fiscal year, as a result of higher
sales that were not met with corresponding increases in R&D spending. R&D
expenses are primarily attributable to the continuing development of the
Company's new Starfire 0.18 micron 200mm and 300mm RTP systems. *The Company
continues to believe that significant investment in R&D is required to keep up
with the demands of the RTP market and to remain competitive. See "Factors That
May Affect Future Results - Rapid Technological Change and Development Risks."

Selling, General and Administrative Expenses

Selling, general and administrative ("SG&A") expenses was $2.1 and $4.5 million
respectively for the three and six month periods ended March 31, 1998,
representing an increase of $151,000 (8%) and $422,000 (10%) when compared with
the same periods in fiscal 1997. As a percentage of net sales, SG&A spending
decreased to 17% and 16% respectively for the three and six month periods ending
March 31, 1998, compared to 18% and 20% for the same periods in fiscal 1997, as
a result of higher sales that were not met with corresponding increases in SG&A
spending. *Through the remainder of the fiscal year, SG&A spending in absolute
dollars is expected to remain in line with current levels; however, actual
spending may fluctuate depending on, among other things, the level of net sales
and 



                                      -12-
<PAGE>   13

                              AG ASSOCIATES, INC.


the sales channel for the Company's products, that could result in higher
commissions. *As a percentage of net sales, SG&A spending may vary from quarter
to quarter.

Interest Income, Net

Interest income, net decreased to $22,000 and $66,000 for the three and six
month periods ended March 31, 1998, from $84,000 and $187,000 respectively in
the comparable periods in fiscal 1997, primarily due to lower interest income
earned on the Company's cash and investments as a result of lower cash and
investment balances.

Provision (Benefit) for Income Taxes

The Company has recorded no tax benefit as a result of its net taxable losses
during the first and second quarters of fiscal 1998. For the second quarter of
fiscal 1998, the net loss was adversely impacted by the Company's inability to
record a credit for income taxes, which was the result of certain changes to the
tax law. *For the remainder of fiscal 1998, the Company will not record any
benefit for income taxes to the extent it does not make a pre-tax profit. *A
significant change in income or loss from anticipated levels would have a
significant impact on the tax rate recorded by the Company.

Backlog

The Company's system backlog (consisting of systems scheduled for delivery
within the next twelve months) as of March 31, 1998 was approximately $10.9
million as compared to approximately $14.6 million at September 30, 1997 and
$12.1 million at December 31, 1997. The decrease in backlog is attributable to
the effects on the worldwide semiconductor industry by the economic crisis in
Asia, and cancellation of $2.8 million in orders. 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 or delay with limited or no penalty. *Because of possible
changes in delivery schedules and additions and cancellations of orders, the
Company's backlog at any particular date is not necessarily indicative of actual
sales for any succeeding period. *Given the decrease in backlog, the Company
expects revenues for the third and fourth quarters of fiscal 1998 to be lower
than revenues for the period ended March 31, 1998; in addition, the Company
expects its results of operations to yield a net loss. *In addition, there can
be no assurance that the Company's net sales will not decline further or that
the Company will not incur increasing net losses. See "Factors That May Affect
Future Results -- Semiconductor Industry Volatility."

Liquidity And Capital Resources

As of March 31, 1998, the Company had cash, cash equivalents and short-term
investments of $1.1 million, compared to $4.2 million as of September 30, 1997.
The decrease of $3.1 million was primarily attributable to the increase in
inventory and capital expenditures in connection with the Company's new Starfire
product development and initial shipment. Working capital decreased to $19.8
million at March 31, 1998 from $22.9 million at September 30, 1997.

The Company's operating activities used cash of $0.8 million during the six
months ended March 31, 1998. Depreciation and amortization charges and a
significant decrease in accounts receivable were partially offset by an increase
in inventory and accrued liabilities. The increase in inventory was primarily
due to the manufacture of the Starfire 0.18 micron RTP systems.

The Company's investing activities used cash of $1.7 million during the six
month period ended March 31, 1998, due to capital expenditures of $2.3 million
primarily for Starfire internal RTP systems and improvements to the
manufacturing facility. *The Company currently anticipates that its capital
expenditures will be approximately $2.1 million for the remainder of fiscal
1998, principally to 



                                      -13-
<PAGE>   14

support new product development and manufacturing cost reductions. *However, the
actual level of capital spending will be dependent on a variety of factors,
including the Company's business requirements and general economic conditions.

Cash provided by financing activities was $0.1 million during the six months
ended March 31, 1998, consisting of proceeds from employee stock transactions.

*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 Asian economic crisis, the uncertain nature of the
semiconductor industry, competitive market conditions, the strong commitment to
developing the Company's next-generation products, and the possible outcome of
current litigation with Applied Materials, liquidity and working capital
requirements are difficult to anticipate beyond the next twelve months.
Subsequent to the second quarter of fiscal 1998, the Company has received a
commitment of a revolving credit facility of up to $15 million dollars. The
facility's availability is contingent upon the Company meeting a financial net
worth covenant and certain accounts receivable requirements. *There is no
assurance that market conditions will allow the Company to continue to qualify
for the facility. *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.


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

        Not applicable.



                                      -14-
<PAGE>   15

                              AG ASSOCIATES, INC.


PART II:  OTHER INFORMATION

Item 1. Legal Proceedings

    The Company is currently involved in an intellectual property litigation. On
April 24, 1997, Applied Materials filed a complaint against the Company, AST
Elektronik GmbH and AST Elektronik U.S.A. (collectively, "AST") in the United
States District Court for the Northern District of California, San Jose
Division, Case No. CV97-20375 RMW. Applied Materials subsequently amended its
complaint. Applied Materials currently alleges that the Company's products
infringe on four Applied Materials patents relating to Rapid Thermal Processing
("RTP") processes and heater head design and seeks a permanent injunction
against infringement, an award of damages for infringement, treble damages for
intentional and willful infringement, attorneys' fees and costs of suit. On July
23, 1997, the Company answered Applied Materials' complaint and counterclaimed
for declaratory relief that the Company's products do not infringe the patents
and that the patents are invalid. On October 3, 1997, the Company filed a
counterclaim in the United States District Court for Northern California, San
Jose Division against Applied Materials for infringement of one of the Company's
RTP process patents. On October 27, 1997, Applied Materials answered the
counterclaim by alleging that it does not infringe the Company's patent and that
the patent is invalid. The Company subsequently amended its complaint to assert
that Applied Materials infringed three additional patents. Applied Material has
moved to dismiss these claims. The trial is set for March 1, 1999. Management
believes Applied Materials' claims are without merit and intends to defend the
Company vigorously, and that the Company's claims against Applied are
meritorious. However, there can be no assurance that this litigation will be
resolved in favor of the Company, and, in any event, litigation could result in
significant expense to the Company and could divert the efforts of the Company's
technical and management personnel from other tasks, whether or not such
litigation is determined in favor of the Company. In particular, the Company
expects to incur increased legal expenses in fiscal 1998 and fiscal 1999. 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 2. Changes in Securities and Use of Proceeds

        Not applicable.


Item 3. Defaults Upon Senior Securities

        Not applicable.


Item 4. Submission of Matters to a Vote of Security Holders

        The annual meeting of the shareholders of AG Associates, Inc. was held
        on February 26, 1998 in San Jose, California. Of the 6,074,198 shares of
        the Company's Common Stock outstanding as of the record date, 5,230,606
        shares were present or represented by proxy at the meeting. The
        following matters were submitted to a vote of the shareholders:

        (1) To elect the following four persons to serve as a Director of the
            Company:

<TABLE>
<CAPTION>
            Name                 Votes For      Votes Withheld
            -----------------    -----------    ----------------
<S>                               <C>                    <C>   
            Arnon Gat, Ph.D.      5,132,412              98,194
            Anita Gat             5,066,446             164,160
            Norio Kuroda          5,125,512             105,094
            Cecil Parker          5,131,512              99,094
</TABLE>



                                      -15-
<PAGE>   16

                              AG ASSOCIATES, INC.


       (2)  To adopt an amendment to the Company's 1993 Stock Option Plan to
            increase the number of shares of Common Stock reserved for issuance
            thereunder by 400,000 shares, from 1,500,000 shares to 1,900,000
            shares:

                    Votes for:                  3,120,805
                    Votes against:                384,931
                    Votes abstaining:              34,512

        The proposal carried. The vote required was a majority of the shares of
        Common Stock present at the meeting in person or by proxy (without
        counting broker non-votes toward the vote required) or at least
        2,615,304 shares of the Company's Common Stock.

        (3) To ratify the selection of Deloitte & Touche LLP as independent
            accountants for the Company for the fiscal year ending September 30,
            1998.

                    Votes for:                  5,151,176
                    Votes against:                 58,884
                    Votes abstaining:              20,546

        The proposal carried. The vote required was a majority of the share of
        Common Stock present at the meeting in person or by proxy (without
        counting broker non-votes toward the vote required) or at least
        2,615,304 shares of the Company's Common Stock.


Item 5. Other Information

        Not applicable.


Item 6. Exhibits and Reports on Form 8-K

        A)  Exhibits

               Exhibit 27    Financial Data Schedule

        B)  Reports on Form 8-K

        No reports on Form 8-K were filed during the quarter ended March 31,
1998.



                                      -16-
<PAGE>   17

                              AG ASSOCIATES, INC.


SIGNATURE


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


                                        AG Associates, Inc.
                                        (Registrant)


Dated:  May 13, 1998                    By: /s/ KIRK JOHNSON
                                            ------------------------------------
                                            Kirk Johnson
                                            Chief Financial Officer
                                            (Duly authorized officer and 
                                            principal financial officer)






                                      -17-
<PAGE>   18

                              AG ASSOCIATES, INC.


EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT NO.           DESCRIPTION
-----------           -----------
<S>                   <C>                       
27                    Financial Data Schedule
</TABLE>















                                      -18-