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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


Form 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934




|                                            |                                 
|------------------------------------------- | --------------------------------
|For the fiscal year ended December 31, 2001 | Commission File Number 000-30637

(AUGUST TECHNOLOGY LOGO)

AUGUST TECHNOLOGY CORPORATION


(Exact name of Registrant as specified in its
charter)


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

(952) 820-0080

(Registrants telephone number, including
area code)


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

None


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

Title of each class:

Common Stock, no par value


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 þ          No o

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
the 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. o

The aggregate market value of voting stock held
by nonaffiliates of the Registrant was $62,962,930 as of
February 28, 2002.

The number of shares of Common Stock, no par
value, outstanding as of February 28, 2002 was 12,825,219.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement to be
delivered to shareholders in connection with the Annual Meeting
of Shareholders to be held April 30, 2002 are incorporated
by reference into Part III.



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AUGUST TECHNOLOGY CORPORATION

FORM 10-K

TABLE OF CONTENTS

For the Year Ended December 31,
2001


|                                     |             |             |                                                                                         |      |  |    | 
|------------------------------------ | ----------- | ----------- | --------------------------------------------------------------------------------------- | ---- |  | -- | 
|                                     |             | Description |                                                                                         | Page
|                                     |             |             |                                                                                         |     
|PART I                               |             |             |                                                                                         |     
|                                     | Item 1.     |             | Business                                                                                |      |  | 2  | 
|                                     | Item 2.     |             | Properties                                                                              |      |  | 7  | 
|                                     | Item 3.     |             | Legal Proceedings                                                                       |      |  | 7  | 
|                                     | Item 4.     |             | Submission of Matters to a Vote of Security
	Holders                                    |      |  | 7  | 
|Executive Officers of the Registrant |             |             | 8                                                                                       |     
|PART II                              |             |             |                                                                                         |     
|                                     | Item 5.     |             | Market for Registrants Common Stock and
	Related Shareholder Matters                   |      |  | 9  | 
|                                     | Item 6.     |             | Selected Financial Data                                                                 |      |  | 10 | 
|                                     | Item 7.     |             | Managements Discussion and Analysis of
	Financial Condition and
	Results of Operations |      |  | 11 | 
|Cautionary Statements                |             |             | 15                                                                                      |     
|                                     | Item 7A.    |             | Qualitative and Quantitative Disclosures about
	Market Risk                             |      |  | 22 | 
|                                     | Item 8.     |             | Financial Statements and Supplementary Data                                             |      |  | 24 | 
|                                     | Item 9.     |             | Changes in and Disagreements With Accountants on
	Accounting and Financial Disclosure   |      |  | 43 | 
|PART III                             |             |             |                                                                                         |     
|                                     | Item 10.    |             | Directors and Executive Officers of the Registrant                                      |      |  | 43 | 
|                                     | Item 11.    |             | Executive Compensation                                                                  |      |  | 43 | 
|                                     | Item 12.    |             | Security Ownership of Certain Beneficial Owners
	and Management                         |      |  | 43 | 
|                                     | Item 13.    |             | Certain Relationships and Related Transactions                                          |      |  | 43 | 
|PART IV                              |             |             |                                                                                         |     
|                                     | Item 14.    |             | Exhibits, Financial Statements, Schedules and
	Reports on Form 8-K                      |      |  | 43 | 
|Signatures                           |             |             | 45                                                                                      |     
|                                     | Schedule II |             | Valuation and Qualifying Accounts                                                       |      |  | 47 | 
|Exhibits                             |             |             | 48                                                                                      |     

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PART I

Item 1.     Business

Introduction

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

In 1997, the introduction and subsequent adoption
of our NSX Series of automated wafer inspection systems created
a new market for automated visual inspection
(AVI) providing device manufacturers with a product
characterization solution that has the performance and
flexibility to seamlessly provide critical process information
throughout the manufacturing process. This information enables
manufacturers to make process improvements and filter out
defective products with minimal impact on the manufacturing
cycle time.

We continued to enhance our product offering in
2001 with the introduction of the 3Di Series of automated
inspection and metrology systems. The 3Di Series again expanded
the AVI market as the first high throughput two dimensional (2D)
and three dimensional (3D) metrology and defect inspection tools
specifically designed for the latest and most advanced
microelectronic device packaging processes, including flip-chip
wafer bumping. We further enhanced our inspection solutions by
introducing our YieldPilot defect review and process analysis
package that allows manufacturers to streamline their inspection
process and effectively convert inspection and metrology data
into useful information for process control.

Our Market

Microelectronic device manufacturers are
continually challenged to meet the price and performance demands
placed on them by the end-user markets. To meet these demands,
manufacturers must continually accelerate time to market, reduce
manufacturing cost and improve device performance. Changes
driven by these demands include the implementation of 300mm
wafer processing, process automation and integration as well as
new process technologies such as advanced packaging and
interconnects (including wafer bumping) and new product designs
such as system level integration(including System-In-a-Package).
Manufacturers in emerging high growth markets such as
optoelectronics, photonics, and MEMS are also making necessary
changes to create cost effective high volume manufacturing
processes.

Product characterization solutions, such as
visual inspection, must keep pace with industry trends in order
for manufacturers to achieve their goals. The industry has
historically relied on people using microscopes and offline
metrology systems to detect defects caused by contamination or
mechanical damage and to make measurements on small samples of
features that need to be characterized. However, these
conventional characterization techniques have become obsolete as
manufacturers cannot afford the time or expense of the
inefficient and error-prone manual inspection process. In
addition, ever tightening product tolerances, as well as the
increased use of foundries and subcontractors leads to the
requirement for 100% inspection capability.

Our tools provide the platforms with which
manufacturers can replace their costly and slow conventional
inspections with automated high throughput inspections that are
virtually transparent to the manufacturing process.
In addition to detecting and filtering out defective products,
our inspection solutions enable device manufacturers to gather
information through AVI that helps them understand their process
and implement

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enhancements. By incorporating proprietary
software and hardware designs, innovative automated materials
handling capabilities and expertise in machine vision
technology, our tools enable manufacturers to implement new cost
saving and process improving inspections at points in the
manufacturing process previously thought impractical for
inspection, ultimately expanding the overall AVI market
potential. As the applications of our product lines increase, we
have expanded into major microelectronic device manufacturers
and subcontractors worldwide with the largest concentrations in
North America, Taiwan, Europe and Japan.


Our Solution

We serve these markets with a combination of high
performance systems, world-class service and support and by
focusing on five strategic objectives:

Technological
Leadership

Superior Performance:We strive to offer the best price/
performance systems in the market by focusing on our core
competencies in machine vision technology, optics, lighting,
precision motion control and data management.

Flexible Technologies:We focus on technologies that allow us
to easily meet the growing and changing needs of our customers
in a timely and cost effective manner. Our flexible designs
enable us to serve multiple microelectronic markets with the
same core products. Our modular solutions provide our customers
with cost efficient choices to configure their systems to meet
specific needs.

Complete solutions through data management:We provide products that not only
collect inspection and metrology data but also facilitate
analysis by converting the data into useful process improving
information. Our system software is designed to integrate
seamlessly with the latest technologies in our customers
manufacturing data management systems enabling the fast and
efficient flow of information.

Market
Expertise

Paramount to the success of our business is our
ability to interpret the needs of our customers and the market.
We are led by our marketing organization that provides a clear
understanding of the needs of these markets and the possible
solutions that already exist in the industry so that we are
ready when our customers are ready for us.

Customer
Application Partnerships

We work very closely with our customers to
develop unique solutions to their inspection needs. Our
engineering services group partners with our customers to
address their specific needs as they look to continually
integrate and optimize our inspection systems in their
production lines. These partnerships allow us to gain market
access, provide competitive barriers and anticipate market needs.

Global
Presence

We continue to develop the infrastructure
necessary to support a global company, utilizing the latest
technologies to effectively place ourselves in our customers
back yard. We have created an efficient global sales
network through international distribution partnerships and an
increasing direct sales and service presence in key regions of
the world. Recently introduced support services include
web-based remote service capability, 24-hour global support and
multi-lingual training.

External
Growth

In addition to strategic relationships with
customers, we are working with other industry leaders through
participation in organizations and consortiums that further the
advancement of markets and technology. In 2001, we co-founded
the Advanced Packaging and Interconnect Alliance (APiA), an
organization that brings together equipment suppliers, material
suppliers, technology companies and customers with the purpose
of accelerating the advancement of new high performance and cost
efficient packaging technologies. We

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continue to look for ways to expand our
technologies and capitalize on market opportunities through
acquisitions, licensing and joint ventures.


Products

Our first product, the CV Series, is an automated
inspection system designed to measure critical dimensions on
wafer carriers used by semiconductor manufacturers. We expanded
our core competency in 1997, becoming pioneers of micro defect
inspection with the introduction of our first NSX Series of
automated wafer inspection systems. In 2001, revenues from the
NSX Series represented 77% of our net revenues. The NSX Series
is driven by advanced proprietary software and includes
integrated yield enhancement tools including automated data
collection and reporting, extensive communication options and
fast, easy setup using Windows®-based menus. The new 3Di
Series, introduced in the third quarter of 2001, builds upon the
NSX technology by incorporating the revolutionary Rapid Confocal
Sensor (RCS) technology to create an inspection system
specifically designed for the advanced packaging and
interconnect market.

Automated micro defect inspection
systems  NSX Series.Our
automated micro defect inspection systems deliver high-speed,
consistent, reliable defect detection to microelectronic
manufacturers. These systems assess the quality of products at
several steps in the device manufacturing process and
immediately feed critical information about process integrity to
yield management or factory automation systems. This data allows
for enhanced process control and ultimately leads to improved
yields. The NSX Series allows for the sharing of process
knowledge and inspection results throughout production and test,
assembly and packaging facilities.

We currently offer the NSX-70, NSX-80, NSX-85,
NSX-90 and NSX-95 models in the NSX Series, providing a wide
range of pricing and functionality. The NSX-105, which is
expected to begin shipping in 2002, will deliver greater
processing speed to customers demanding even higher throughput.
In addition to whole wafer and film frame handling capabilities,
300mm wafer capability was introduced in 2001.

Our NSX Series systems currently range in price
from approximately $200,000 to $900,000, depending on the
complexity of the configuration. Customers may tailor systems
toward their specific application, process, or budget, by
choosing from a range of system capabilities.

Automated Wafer Bump Inspection
Systems  3Di Series.Introduced in 2001, our 3Di-8000
automated wafer bump inspection system is the first complete 2D
and 3D production worthy bumped wafer inspection system on the
market. Building on the full capability of the NSX Series, the
3Di-8000 features the newly commercialized RCS 3D inspection
technology. This new patent-pending technology combines high
speed and high accuracy 3D inspection by merging the proven
concepts of confocal microscopy with innovative optical design
and proprietary software. This technology, although still in its
infancy, meets and exceeds the performance of existing 3D
metrology technologies. The RCS is particularly well suited for
the future of 3D bump and other advanced packaging inspection
because of its ability to scale down to meet the future
requirements of our customers. RCS technology is also capable of
meeting the 3D inspection needs of the growing markets of
optoelectronics, MEMS and other microstructures.

The combination of micro defect inspection and,
2D and 3D measurement capability provides a single complete
inspection solution for those manufacturers who bump wafers or
handle them with subsequent processing. As with the NSX Series,
the 3Di Series is available with the 300mm wafer handler in
addition to smaller wafer sizes and film frames and may be
tailored toward specific customer applications with various
options and features. The 3Di Series currently ranges in price
from approximately $450,000 to $1,300,000, depending upon the
complexity of the configuration.

Defect review and process analysis
software  YieldPilot.Introduced in 2001, YieldPilot
provides our customers with additional functionality for their
inspection process by both simplifying and speeding up the
defect review process and providing an engineering data analysis
tool that can be used to turn inspection data into useful
process improving information. YieldPilot can be sold in
multiple configurations ranging from $50,000 to $140,000,
providing users different capabilities depending on their needs.

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Other Products.We
offer a series of cassette verification systems, referred to as
the CV Series, designed to automatically verify critical wafer
carrier dimensions. Using advanced machine vision technology and
proprietary software, our CV Series systems identify
out-of-tolerance cassettes, allowing semiconductor device
manufacturers to remove dimensionally defective cassettes and
thereby decrease wafer damage and improve yield. We recently
expanded the CV Series to include 300mm solutions in addition to
our standard 200mm solutions. Systems within the CV Series
currently range in price from $85,000 to $250,000 depending upon
the configuration of the system.

Research and Development

Our success depends upon our ability to
effectively develop and commercialize new technologies and
products. Our research and development activities emphasize
application development and new product introductions in
collaboration with our customers. Our engineering teams support
these efforts with software development, machine vision
technology, optics, lighting and precision motion control
expertise. We work closely with our customers to define new
product features and to identify emerging applications for our
products. Our research and development efforts throughout 2001
have focused on the development and introduction of our 3Di and
YieldPilot systems and on developing new application solutions
and automation modules for the NSX Series. We spent 26.7% of our
net revenue on research and development during 2001, 21.9%
during 2000 and 19.2% during 1999.

To maintain technical leadership in each of the
markets we serve, we plan to continue to spend aggressively in
research and development, add additional capabilities and
options to our systems and pursue selective strategic
acquisitions, licenses, joint ventures, collaborations, mergers
or other technology partnerships or arrangements of
technologies, product lines and companies.

Customers

We have sold our NSX Series systems to many of
the leading semiconductor and microelectronic manufacturers
throughout the world. In 2001, 44% of our net revenues were
derived from sales outside of the U.S., consisting of 18% to
customers in Taiwan, 13% to customers in Japan and 13% to
customers in other countries, including Northern Ireland, South
Korea, Singapore, Switzerland, Germany and the United Kingdom.
Customers accounting for greater than 10% of net revenues during
2001 included Intel Corporation and Seagate Technology LLC.
There were no other customers, excluding our distributors, which
accounted for greater than 10% of net revenues during 2001 or
2000.

Sales, Service and Marketing

We provide direct sales, service and field
application support through strategically placed offices in the
U.S. We currently have domestic sales and service personnel in
Silicon Valley, southern California, Arizona, North Carolina,
Texas, Oregon, Connecticut and at our corporate headquarters in
Minnesota.

In 2001 we opened an office in Taiwan providing
direct sales, customer service and support to the significant
and growing Taiwanese semiconductor and microelectronic markets.
With the opening of this office, we modified our ongoing
relationship with our distributor, Metron Technology B.V., to
focus Metrons activities on the remaining regions in Asia,
excluding Japan where Marubeni Solutions Corporation is our
distributor. We market our products in Europe through our
distributors Quasys AG and Firfax Systems. Each of our primary
distributors has entered into international distributor
agreements with us. All of our distributor agreements grant our
distributors an exclusive territory, provide for price and
payment procedures, specify the applicable warranty procedures
and contain a confidentiality provision.

Backlog

Our backlog was $5.2 million as of
December 31, 2001, as compared to $9.6 million as of
December 31, 2000. Our backlog consists of orders for which
we have accepted purchase orders and assigned shipment dates
within the next twelve months. These orders are subject to
cancellation or delay by the customer without

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penalty. In addition, since only a portion of our
revenues for any quarter represents systems in backlog, we do
not believe that backlog is a meaningful or accurate indication
of our future revenues and performance.


Competition

While we believe that we currently have a
significant lead in the commercialization of solutions for the
micro defect inspection market, several other firms also
manufacture similar products. Our primary competitors are
Semiconductor Technologies & Instruments, Inc., Robotic
Vision Systems, Inc., Electroglas, Inc. and Toray Industries,
Inc. In addition, a number of other companies are active in the
semiconductor capital equipment market, particularly in
automated inspection for sub-micron defects in the wafer
processing portion of the semiconductor manufacturing process,
and could become competitors in the future. Many of our
competitors and potential competitors have substantially greater
financial, engineering, manufacturing and marketing resources.

Significant competitive factors in our market
include performance, ease of use, development of new
technologies, established customer base, application support,
customer service, product flexibility, price and ability to
deliver products on a timely basis. We believe we compete
favorably with respect to these factors, but must continue to
develop and design new and improved products in order to
maintain our competitive position.

Manufacturing

We perform system design, assembly and testing at
our headquarters in Bloomington, Minnesota. We utilize an
outsourcing strategy for the manufacture of many of our
components and major subassemblies. Our manufacturing activities
are considered horizontal in nature and consist primarily of
testing and assembling parts, components and subassemblies
(collectively parts) acquired from our vendors and
integrating the parts into our products. To meet specific
customer requirements, we often manufacture products that
include custom system engineering and software development. Our
manufacturing operations do not require a major investment in
capital equipment.

We use numerous domestic and international
vendors to supply parts for the manufacture and support of our
products. Although we make reasonable efforts to ensure that
parts are available from multiple qualified suppliers, this is
not always possible; accordingly, some key parts may be obtained
only from a single supplier or a limited group of suppliers. We
endeavor to minimize the risk of product interruption by
selecting and qualifying alternative suppliers for key parts,
monitoring the financial condition of key suppliers and
maintaining appropriate inventories of key parts. If we do not
receive a sufficient quantity of parts in a timely and
cost-effective manner to meet production requirements, our
results of operations may be materially and adversely affected.
We do not maintain long-term supply contracts with any of our
suppliers. We do enter into blanket purchase orders with less
than twelve month terms for parts with long lead times. These
purchase orders are generally to lock-in price and provide the
supplier with visibility of future requirements.

Intellectual Property

Proprietary information plays a significant role
in the development of our products. We rely upon a combination
of contract provisions, copyright, trademark, patent and trade
secret laws to protect our proprietary know-how, ideas,
inventions, goodwill and rights in our solutions and products.
We also have a policy of seeking U.S. and foreign patents on
technology considered of particular strategic or competitive
importance. As of December 31, 2001, we have two issued
U.S. patents and a variety of pending U.S. patent applications.
We have also applied for foreign patent rights in key strategic
markets as to key solutions and products. The technological
focus of the issued and pending applications includes general
microelectronic 2D and 3D inspection techniques as well as
devices, systems and processes in the following areas: lighting,
focusing, sensing, viewing, material handling, imaging,
inspecting and data manipulating.

Although we believe that the copyrights,
trademarks and U.S. patents we own are of value, we do not
believe that they will determine our success, which depends
principally upon our engineering, manufacturing, marketing and
service skills. We also license some of our non-exclusive
software programs from third party developers and incorporate
them in our products.

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In the normal course of business, we regularly
monitor and make inquiries, if necessary, regarding possible
infringement of our patents by others. Should it become
necessary or prudent, we intend to protect our rights when, in
our view, others infringe upon these rights. We similarly take
necessary and prudent steps to respect the intellectual property
rights of others.

Employees

As of December 31, 2001, we employed 156
people, including 55 in research and development, 22 in
manufacturing, 26 in service, technical support and training, 31
in sales and marketing, and 22 in administration. We also employ
independent contractors and temporary employees. None of our
employees is represented by a labor union and we consider our
employee relations to be good.

Item 2.     Properties

|                |  |                          |  |                                                                                       |  |                |        |           |  |  |        | 
|--------------- |  | ------------------------ |  | ------------------------------------------------------------------------------------- |  | -------------- | ------ | --------- |  |  | ------ | 
|Location        |  | Type                     |  | Principal Use                                                                         |  | Square Footage |        | Ownership
|                |  |                          |  |                                                                                       |  |                |        |          
|Bloomington, MN |  | Office, plant, warehouse |  | Headquarters, Research and Development, Sales and
	Service, Marketing, Administration |  |                | 62,843 | (a)       |  |  | Leased | 
|Hsinchu, Taiwan |  | Office, warehouse        |  | Sales and Service                                                                     |  |                | 4,607  |           |  |  | Leased | 
|Hsinchu, Taiwan |  | Warehouse                |  | Sales and Service                                                                     |  |                | 2,842  |           |  |  | Leased | 



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|    |                                                                                                                                                                                                   
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | We have exercised an option to lease an
	additional 15,594 square feet beginning March 1, 2002. The
	lease expires on April 30, 2006, but may be renewed by us
	for an additional three-year term.

Item 3.     Legal
Proceedings

From time to time in the ordinary course of
business, we are subject to claims, asserted or unasserted, or
named as a party to lawsuits or investigations. Litigation, in
general, and intellectual property and securities litigation in
particular, can be expensive and disruptive to normal business
operations. Moreover, the results of legal proceedings cannot be
predicted with any certainty, and in the case of more complex
legal proceedings such as intellectual property and securities
litigation, the results are difficult to predict at all. We are
not aware of any asserted or unasserted legal proceedings or
claims that we believe would have a material adverse effect on
our financial condition or results of our operations.

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

There were no matters submitted to a vote of our
shareholders during the quarter ended December 31, 2001.

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Executive Officers of the Registrant

The following sets forth the names and ages of
our current executive officers in addition to information
regarding their positions, their periods of service in such
positions and their business experience for the past five years.
Executive officers generally serve in office for terms of
approximately one year.

|                   |  |     |    |          |  |                                                                        
|------------------ |  | --- | -- | -------- |  | -----------------------------------------------------------------------
|Name               |  | Age |    | Position
|                   |  |     |    |         
|Jeff L. ODell     |  |     | 41 |          |  | Chief Executive Officer and Director                                   
|David L. Klenk     |  |     | 37 |          |  | President and Chief Operating Officer                                  
|Thomas C. Velin    |  |     | 40 |          |  | Chief Financial Officer                                                
|Thomas C. Verburgt |  |     | 38 |          |  | Chief Technology Officer and Director                                  
|Mark R. Harless    |  |     | 41 |          |  | Chief Engineer and Director                                            
|John M. Vasuta     |  |     | 33 |          |  | Vice President of Intellectual Property, General
	Counsel and Secretary
|D. Mayson Brooks   |  |     | 43 |          |  | Vice President of Worldwide Sales and Field
	Operations                
|Wayne J. Hubin     |  |     | 58 |          |  | Vice President of Manufacturing                                        
|Albert A. Eliasen  |  |     | 36 |          |  | Vice President of Engineering                                          

Jeff L. ODellco-founded August Technology in 1992
and has served as our Chief Executive Officer since 1992 and
Chairman of the Board since 1994. From 1992 to July 2001,
Mr. ODell also served as President. From August 1987
to August 1992, Mr. ODell was Director of Sales and
Marketing for MicroVision Corporation, which develops and
manufactures robotic and inspection systems. From February 1985
to August 1987, Mr. ODell was a Field Applications
Engineer for Cognex Corporation, which designs, develops and
markets machine vision systems that are used to automate a wide
range of manufacturing processes. From March 1984 to February
1985, Mr. ODell served as a Systems Analyst for
Control Data Corporation.

David L. Klenkhas
been with us since April 1993 and was named President and Chief
Operating Officer in July 2001. Mr. Klenk served on our
Board of Directors from 1994 to March 2000. Mr. Klenk
oversees the engineering, manufacturing, customer service, and
human resources groups. Prior to becoming President,
Mr. Klenk served as our Chief Operating Officer and
Director of Operations. Mr. Klenk is a brother-in-law of
Mark Harless, our Chief Engineer.

Thomas C. Velinhas
served as our Chief Financial Officer since September 1998.
Prior to joining us, Mr. Velin was Chief Financial Officer
for Lloyds Food Products, Inc., a producer of specialty
food products, from May 1996 to June 1998. From November 1989 to
May 1996, Mr. Velin was Corporate Controller for Telex
Communications, Inc., a provider of sophisticated audio,
wireless and multimedia communications equipment. Mr. Velin
is a licensed certified public accountant.

Thomas C. Verburgthas been with us since April 1993,
most recently as Chief Technology Officer, and has served on our
Board of Directors since 1994. Prior to becoming our Chief
Technology Officer in September 1999, Mr. Verburgt served
as Director of Software Engineering since joining us in April
1993. From January 1992 to April 1993, Mr. Verburgt held a
senior software engineering position at MTS Systems Corporation,
a technology based company providing engineering services,
equipment and software for applications in research product
development, quality control and production. From June 1984 to
January 1992, Mr. Verburgt was Senior Software Engineer for
the Perkin Elmer Corporation, a manufacturer of instrument
systems and software for the pharmaceutical, biotechnology,
agricultural and chemical industries.

Mark R. Harlessco-founded August Technology in 1992
and has been a member of our Board of Directors since 1994.
Mr. Harless has held various positions with us, most
recently serving as our Chief Engineer. From 1988 to 1992, Mr.
Harless was a Systems Engineer at MicroVision Corporation, where
he developed custom robotic and inspection systems. From 1985 to
1988, Mr. Harless worked as a Development Engineer at
Honeywell, Inc. Mr. Harless is a brother-in-law of David
Klenk, our President and Chief Operating Officer.

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John M. Vasutajoined us as Vice President of
Intellectual Property and General Counsel in May 2000.
Mr. Vasuta has also been our Secretary or Assistant
Secretary since October 2000. From February 1999 to May 2000,
Mr. Vasuta was Senior Intellectual Property Counsel with
Bridgestone-Firestone, a manufacturer of tires, fiber optics and
automotive parts. From July 1997 to February 1999,
Mr. Vasuta was Senior Patent Counsel and Research and
Development Business Manager for Kennametal Inc., a tooling
manufacturer. Mr. Vasuta was an attorney in various law firms
from 1991 to 1997, most recently at Sand & Sebolt, where he
was a partner.

D. Mayson Brooksbecame our Vice President of Worldwide
Sales and Field Operations in February 2002. Prior to becoming
Vice President of Worldwide Sales and Field Operations,
Mr. Brooks served as our Vice President of Sales and
Marketing since July 1999. Prior to joining us, from June 1987
through June 1999, Mr. Brooks worked in various managerial
capacities for Air Products and Chemicals, Inc., most recently
as Commercial Manager, European electronics division.
Mr. Brooks served from June 1981 to May 1987 in the United
States Navy and was awarded two achievement medals.

Wayne J. Hubinhas
been our Vice President of Manufacturing since November 1999.
Before joining us, Mr. Hubin was Manufacturing Operations
Manager for BOC Edwards, Inc. from August 1999 to November 1999.
From 1984 to August 1999, Mr. Hubin worked in various
managerial capacities for FSI International, Inc., a supplier of
micro-lithography, surface conditioning and chemical dispense
equipment used in the fabrication of microelectronics, most
recently as Manufacturing Operations Manager.

Albert A. Eliasenjoined us as Vice President of
Engineering in November 2000. Prior to joining us,
Mr. Eliasen was employed by Axcelis Technologies, Inc., a
semiconductor equipment supplier, from May 1995 to November
2000. He served in various capacities with Axcelis Technologies,
most recently as TPS Platform Manager, managing engineers for
the thermal products platform including new product development
and sustaining engineering.

PART II



|        |                                                                      
|------- | ---------------------------------------------------------------------
|Item 5. | Market for Registrants Common Stock and
	Related Shareholder Matters

Market Information

Our common stock, no par value (the Common
Stock), has traded under the symbol AUGT on
the Nasdaq National Market since our initial public offering on
June 14, 2000. There was no market for our Common Stock
prior to that date.

The following table sets forth the reported high
and low closing sale prices for shares of our Common Stock on
the Nasdaq National Market during the indicated quarters.

|       |  |      |       |      |  |      |      |     |  |   |       |  |  |   |       | 
|------ |  | ---- | ----- | ---- |  | ---- | ---- | --- |  | - | ----- |  |  | - | ----- | 
|       |  |      |       |     
|       |  | 2001 |       | 2000
|       |  |      |       |     
|       |  | High |       | Low  |  | High |      | Low
|       |  |      |       |      |  |      |      |    
|First  |  | $    | 14.50 |      |  | $    | 9.94 |     |  | $ |      |  |  | $ |      | 
|Second |  |      | 14.35 |      |  |      | 9.60 |     |  |   | 17.94 |  |  |   | 15.19 | 
|Third  |  |      | 14.71 |      |  |      | 8.20 |     |  |   | 17.88 |  |  |   | 12.38 | 
|Fourth |  |      | 11.04 |      |  |      | 7.35 |     |  |   | 16.38 |  |  |   | 10.00 | 

Holders

As of March 8, 2002, there were
approximately 225 holders of record of our Common Stock. In
addition, based on information obtained from our transfer agent,
there are approximately 1,908 holders whose stock is held in
nominee name and/or street name brokerage accounts.

9



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##### 



Dividends

We have not declared or paid any cash dividends
on our Common Stock to date and do not anticipate paying cash
dividends for the foreseeable future. We currently intend to
retain earnings, if any, to support the development of our
business. Payment of future dividends, if any, will be at the
discretion of our board of directors after taking into account
various factors, including our financial condition, operating
results and current and anticipated cash needs. In addition, our
current credit facility limits our ability to pay any cash
dividends without our lenders consent.



|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data

The consolidated statement of operations data set
forth below for each of the years ended December 31, 2001,
2000 and 1999 and the consolidated balance sheet data as of
December 31, 2001 and 2000 are derived from the audited
consolidated financial statements, included elsewhere in this
Form 10-K. The statement of operations data set forth below
for the years ended December 31, 1998 and 1997 and the
balance sheet data as of December 31, 1999, 1998 and 1997
are derived from audited financial statements, which are not
included in this Form 10-K. You should read the data set
forth below in conjunction with the audited consolidated
financial statements and notes thereto and
Managements Discussion and Analysis of Financial
Condition and Results of Operations appearing elsewhere in
this Form 10-K.

|                              |                                                                 |                                       |   |        |        |      |   |        |        |      |   |        |       |   |   |       |       |  |   |       |       | 
|----------------------------- | --------------------------------------------------------------- | ------------------------------------- | - | ------ | ------ | ---- | - | ------ | ------ | ---- | - | ------ | ----- | - | - | ----- | ----- |  | - | ----- | ----- | 
|                              |                                                                 |                                      
|                              |                                                                 | Years Ended December 31,             
|                              |                                                                 |                                      
|                              |                                                                 | 2001                                  |   | 2000   |        | 1999 |   | 1998   |        | 1997
|                              |                                                                 |                                       |   |        |        |      |   |        |        |     
|                              |                                                                 |                                      
|                              |                                                                 | (In thousands, except per share data)
|Statement of Operations Data: |                                                                 |                                       |   |        |        |      |   |        |        |      |   |        |       |   |   |       |       |  |   |      
|                              | Net revenues                                                    |                                       | $ | 29,784 |        |      | $ | 31,666 |        |      | $ | 12,058 |       |   | $ | 5,787 |       |  | $ | 4,192 |      
|                              | Cost of revenues                                                |                                       |   | 12,039 |        |      |   | 12,594 |        |      |   | 5,110  |       |   |   | 2,686 |       |  |   | 2,141 |      
|                              |                                                                 |                                       |   |        |        |      |   |        |        |      |   |        |       |   |   |       |       |  |   |      
|                              |                                                                 | Gross profit                          |   |        | 17,745 |      |   |        | 19,072 |      |   |        | 6,948 |   |   |       | 3,101 |  |   |       | 2,051 | 
|                              | Selling, general and administrative expenses                    |                                       |   | 11,800 |        |      |   | 10,100 |        |      |   | 4,737  |       |   |   | 2,174 |       |  |   | 1,004 |      
|                              | Research and development expenses                               |                                       |   | 7,940  |        |      |   | 6,945  |        |      |   | 2,318  |       |   |   | 924   |       |  |   | 734   |      
|                              | Non-recurring expenses                                          |                                       |   | 579    |        |      |   | 326    |        |      |   |       |       |   |   |      |       |  |   |      |      
|                              |                                                                 |                                       |   |        |        |      |   |        |        |      |   |        |       |   |   |       |       |  |   |      
|                              |                                                                 | Operating income (loss)               |   |        | (2,574 | )    |   |        | 1,701  |      |   |        | (107  | ) |   |       | 3     |  |   |       | 313   | 
|                              | Interest income (expense), net                                  |                                       |   | 1,427  |        |      |   | 978    |        |      |   | (42    | )     |   |   | (1    | )     |  |   | (1    | )    
|                              | Other expense                                                   |                                       |   | (17    | )      |      |   |       |        |      |   |       |       |   |   |      |       |  |   |      |      
|                              |                                                                 |                                       |   |        |        |      |   |        |        |      |   |        |       |   |   |       |       |  |   |      
|                              | Income (loss) before provision for (benefit
	from) income taxes |                                       |   | (1,164 | )      |      |   | 2,679  |        |      |   | (149   | )     |   |   | 2     |       |  |   | 312   |      
|                              | Provision for (benefit from) income taxes                       |                                       |   | (813   | )      |      |   | 807    |        |      |   | (17    | )     |   |   | 2     |       |  |   | 125   |      
|                              |                                                                 |                                       |   |        |        |      |   |        |        |      |   |        |       |   |   |       |       |  |   |      
|                              |                                                                 | Net income (loss)                     |   | $      | (351   | )    |   | $      | 1,872  |      |   | $      | (132  | ) |   | $     |      |  |   | $     | 187   | 
|                              |                                                                 |                                       |   |        |        |      |   |        |        |      |   |        |       |   |   |       |       |  |   |      
|                              | Net income (loss) per share:                                    |                                       |   |        |        |      |   |        |        |      |   |        |       |   |   |       |       |  |   |       |      
|                              |                                                                 | Basic                                 |   | $      | (0.03  | )    |   | $      | 0.17   |      |   | $      | (0.02 | ) |   | $     |      |  |   | $     | 0.02  | 
|                              |                                                                 |                                       |   |        |        |      |   |        |        |      |   |        |       |   |   |       |       |  |   |      
|                              |                                                                 | Diluted                               |   | $      | (0.03  | )    |   | $      | 0.16   |      |   | $      | (0.02 | ) |   | $     |      |  |   | $     | 0.02  | 
|                              |                                                                 |                                       |   |        |        |      |   |        |        |      |   |        |       |   |   |       |       |  |   |      
|                              | Weighted average common shares:                                 |                                       |   |        |        |      |   |        |        |      |   |        |       |   |   |       |       |  |   |       |      
|                              |                                                                 | Basic                                 |   |        | 12,723 |      |   |        | 11,049 |      |   |        | 8,688 |   |   |       | 7,955 |  |   |       | 7,500 | 
|                              |                                                                 | Diluted                               |   |        | 12,723 |      |   |        | 11,770 |      |   |        | 8,688 |   |   |       | 7,955 |  |   |       | 7,505 | 

10



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##### 



|                    |                            |                |   |        |  |      |   |        |  |      |   |       |  |  |   |       |  |  |   |       | 
|------------------- | -------------------------- | -------------- | - | ------ |  | ---- | - | ------ |  | ---- | - | ----- |  |  | - | ----- |  |  | - | ----- | 
|                    |                            |               
|                    |                            | December 31,  
|                    |                            |               
|                    |                            | 2001           |   | 2000   |  | 1999 |   | 1998   |  | 1997
|                    |                            |                |   |        |  |      |   |        |  |     
|                    |                            |               
|                    |                            | (In thousands)
|Balance Sheet Data: |                            |                |   |        |  |      |   |        |  |      |   |       |  |  |   |       |  |  |   |      
|                    | Working capital            |                | $ | 37,171 |  |      | $ | 36,872 |  |      | $ | 2,494 |  |  | $ | 1,125 |  |  | $ | 289   | 
|                    | Total assets               |                |   | 47,155 |  |      |   | 47,897 |  |      |   | 6,676 |  |  |   | 2,686 |  |  |   | 1,794 | 
|                    | Total debt                 |                |   |       |  |      |   |       |  |      |   | 1,224 |  |  |   | 190   |  |  |   |      | 
|                    | Total shareholders equity |                |   | 42,523 |  |      |   | 41,685 |  |      |   | 3,347 |  |  |   | 1,411 |  |  |   | 465   | 

Item 7.     Managements
Discussion and Analysis of Financial Condition and Results of
Operations

Overview

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

We were subject to significant quarterly and
annual fluctuations in demand for our products during 2001, 2000
and 1999 due to the cyclical nature of the microelectronic
device manufacturing markets we serve. These cycles were
generally driven by changes in technology, economic conditions
affecting demand for these devices and capacity requirements.
These factors and the overall downturn in the global economy
caused changes in the timing of both orders and sales. Future
quarterly and annual results will continue to be impacted by
these cycles, the timing of new product announcements and
releases by us or our competitors, market acceptance of new or
enhanced versions of our products, changes in the pricing of our
products and the timing and level of our research and
development expenditures.

In preparing the consolidated financial
statements in conformity with accounting principles generally
accepted in the United States of America, we must make decisions
which impact the reported amounts and the related disclosures.
Such decisions include the selection of the appropriate
accounting principles to be applied and the assumptions on which
to base accounting estimates. In reaching such decisions, we
apply judgment based on our understanding and analysis of the
relevant circumstances. Note 1 to the consolidated
financial statements provides a summary of the significant
accounting policies followed in the preparation of the
consolidated financial statements.

Our critical accounting policies include the
following:

Revenue Recognition.We derive revenues from the sale
of systems, spare parts and services.

System Sales  Established
Products.We require customers,
excluding our distributors, that have new inspection
applications to complete pre-shipment authorization testing of
purchased systems at our facility prior to shipment. During this
testing, the customer verifies that the system meets their
specifications and authorizes shipment. When the customer has
already accepted a previous system, with the same
specifications, for the same application, we do not require
pre-shipment authorization testing.

Sales of established products are accounted for
as multiple-element arrangements. Under this method, the total
value is allocated first to undelivered elements, such as
installation, based on their fair values, with the remainder
being allocated to system revenue. System revenue is recognized
once the product has shipped, title and risk of loss have
transferred to the customer and collection of the resulting
receivable is probable. We

11



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##### 



do not deem installation to be essential to the
functionality of our systems as it does not involve altering the
systems features or capabilities or the building of
complex interfaces. We have had no systems returned after
shipment.


System Sales  New
Products.Revenues related to sales of
systems that have not been demonstrated to meet customer
specifications prior to shipment are recognized once title and
risk of loss have transferred to the customer, installation has
occurred and collection of the resulting receivable is probable.

Spare parts revenue.Spare parts revenue is recognized when the parts have been
shipped, title and risk of loss have transferred to the customer
and collection of the resulting receivable is probable.

Service revenue.Service revenues are recognized after the services are performed
and collection of the resulting receivable is probable. Revenues
from maintenance contracts are recognized ratably over the
period of the contract. Service revenues were insignificant
during the years ended December 31, 2001, 2000 and 1999.

Valuation of Accounts Receivable.We review accounts receivable to
determine which are doubtful of collection. In making the
determination of the appropriate allowance for doubtful
accounts, we consider our history of write-offs, relationships
with our customers and the overall credit worthiness of our
customers. For the three years ended December 31, 2001, we
have had accounts receivable write-offs totaling $21,000.
Changes in the credit worthiness of customers, general economic
conditions and other factors may impact the level of future
write-offs.

Valuation of Inventory.We review obsolescence to
determine that inventory items deemed obsolete are appropriately
reserved. In making the determination, we consider future sales
of related products and quantity of inventory at the balance
sheet date assessed against each parts past usage rates
and future expected usage rates. For the three years ended
December 31, 2001, we have written off inventory totaling
$128,000. We have an allowance for obsolete inventory of
$193,000 at December 31, 2001. This allowance represents
our estimate of obsolete inventory as of December 31, 2001.
Changes in factors such as technology, customer demand,
competitor product introductions and other matters could affect
the level of inventory obsolescence in the future.

The following discussion of our financial
condition and results of operations should be read in
conjunction with the audited consolidated financial statements
and the notes thereto and with the Cautionary
Statements section included elsewhere in this
Form 10-K.

The following table presents the consolidated
statements of operations as a percentage of net revenues.

|                                                                |                         |                          |       |      |    |      |       |      |   |  |       |      |   
|--------------------------------------------------------------- | ----------------------- | ------------------------ | ----- | ---- | -- | ---- | ----- | ---- | - |  | ----- | ---- | --
|                                                                |                         |                         
|                                                                |                         | Years Ended December 31,
|                                                                |                         |                         
|                                                                |                         | 2001                     |       | 2000 |    | 1999
|                                                                |                         |                          |       |      |    |     
|Net revenues                                                    |                         |                          | 100.0 | %    |    |      | 100.0 | %    |   |  | 100.0 | %   
|Cost of revenues                                                |                         |                          | 40.4  |      |    |      | 39.8  |      |   |  | 42.4  |     
|                                                                |                         |                          |       |      |    |      |       |      |   |  |       |     
|                                                                | Gross profit            |                          |       | 59.6 |    |      |       | 60.2 |   |  |       | 57.6 |   
|                                                               
|Selling, general and administrative expenses                    |                         |                          | 39.6  |      |    |      | 31.9  |      |   |  | 39.3  |     
|Research and development expenses                               |                         |                          | 26.7  |      |    |      | 21.9  |      |   |  | 19.2  |     
|Non-recurring expenses                                          |                         |                          | 1.9   |      |    |      | 1.0   |      |   |  |      |     
|                                                                |                         |                          |       |      |    |      |       |      |   |  |       |     
|                                                                | Operating income (loss) |                          |       | (8.6 | )  |      |       | 5.4  |   |  |       | (0.9 | ) 
|                                                               
|Interest income (expense), net                                  |                         |                          | 4.8   |      |    |      | 3.1   |      |   |  | (0.3  | )   
|Other expense                                                   |                         |                          | (0.1  | )    |    |      |      |      |   |  |      |     
|                                                                |                         |                          |       |      |    |      |       |      |   |  |       |     
|Income (loss) before provision for (benefit
	from) income taxes |                         |                          | (3.9  | )    |    |      | 8.5   |      |   |  | (1.2  | )   
|Provision for (benefit from) income taxes                       |                         |                          | (2.7  | )    |    |      | 2.6   |      |   |  | (0.1  | )   
|                                                                |                         |                          |       |      |    |      |       |      |   |  |       |     
|                                                                | Net income (loss)       |                          |       | (1.2 | )% |      |       | 5.9  | % |  |       | (1.1 | )%
|                                                                |                         |                          |       |      |    |      |       |      |   |  |       |     

12



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##### 



Results of Operations

Year ended
December 31, 2001 compared to the year ended
December 31, 2000

Net Revenues.Net
revenues decreased $1.9 million, or 5.9%, to $29.8 million
in 2001, from $31.7 million in 2000. The decrease in net
revenues was the result of fewer shipments of our NSX systems
due to a worldwide decline in capital spending by both
semiconductor and microelectronic device manufacturers
throughout 2001. This decline was the result of a significant
slowdown in demand for the devices these manufacturers produce,
which resulted in manufacturers having increased inventory,
overcapacity and, consequently, lower capital spending. Net
revenues derived from the sale of NSX systems represented 77%
and 90% of net revenues in 2001 and 2000, respectively.

Gross Profit.Gross
profit decreased to $17.7 million, or 59.6% of net
revenues, in 2001, from $19.1 million, or 60.2% of net
revenues, in 2000. The decrease in gross margin percentage was
primarily due to the decrease in the number of systems shipped,
which resulted in lower manufacturing utilization and increased
labor and overhead costs per system sold.

Selling, General and Administrative.Selling, general and administrative
expenses increased $1.7 million, or 16.8%, to
$11.8 million, or 39.6% of net revenues, in 2001, from
$10.1 million, or 31.9% of net revenues, in 2000. The
increased expense dollars were due to salaries and benefits
related to sales, customer service and administrative employees
hired during the second half of 2000 and costs associated with
opening our direct sales and service office in Taiwan in 2001.
These increases were partially offset by lower discretionary and
compensation expenses during the second half of 2001 as a result
of cost cutting initiatives that were implemented in response to
the decrease in orders and shipments during this period.

Research and Development.Research and development expenses
increased $1.0 million, or 14.3%, to $7.9 million, or
26.7% of net revenues, in 2001, from $6.9 million, or 21.9%
of net revenues, in 2000. The increase was due to salaries and
benefits related to additional engineers hired during 2000 to
advance the development of our new 3Di and YieldPilot systems,
partially offset by a decrease in hiring and compensation
related expenses during the second half of 2001 as a result of
cost cutting initiatives that were implemented during this
period.

Non-recurring expenses.Non-recurring expenses in 2001 of
$579,000 include $231,000 of employee severance costs related to
reductions in work force implemented in the second and fourth
quarters in response to the decrease in orders and shipments
during this period, and $348,000 of expenses related to the
termination of our distributor agreement in Taiwan, as a result
of our decision to sell direct to customers in Taiwan.
Non-recurring expense in 2000 consists entirely of the write-off
of certain internal business automation software as a result of
our decision to discontinue the implementation of this software.

Interest income (expense), net.Net interest income increased $449,000
to $1.4 million in 2001 from $1.0 million in 2000. The
increase is due to interest income earned from investing the
proceeds received from our initial public offering (the
IPO) in June 2000 for all of 2001, partially offset
by lower overall investment balances in 2001, due to the use of
cash to fund operations and lower rates of return earned on
investment balances.

Income Taxes.The
benefit from income taxes in 2001 was $813,000, or an effective
tax rate of 69.8%, compared to a provision for income taxes of
$807,000, or an effective tax rate of 30.1%, in 2000. The high
effective income tax rate in 2001, compared to the federal
statutory rate of 34% plus state and local taxes, was primarily
due to the impact of federal and state general business and
extraterritorial income credits and tax exempt interest income
that will not be utilized until future years due to our net
loss. The low effective income tax rate in 2000 was primarily
due to federal and state general business credits. Based on an
assessment of our taxable earnings history and prospective
future taxable income, we have determined it to be more likely
than not that our net deferred tax asset will be realized in
future periods. We may be required to provide a valuation
allowance for this asset in the future if we do not generate
sufficient taxable income as planned.

13



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##### 



Year ended
December 31, 2000 compared to the year ended
December 31, 1999

Net Revenues.Net
revenues increased $19.6 million, or 162.6%, to $31.7
million in 2000, from $12.1 million in 1999. The increase
in net revenues was due primarily to the continued growth in
sales of NSX systems, which increased 177.0% over 1999. The
increase in sales of the NSX systems was driven by the need for
semiconductor and microelectronic device manufacturers to
increase yields and capacity due to strong demand for their
products. Net revenues derived from sales of NSX systems
represented 90% and 85% of net revenues in 2000 and 1999,
respectively.

Gross Profit.Gross
profit increased to $19.1 million, or 60.2% of net
revenues, in 2000, from $6.9 million, or 57.6% of net
revenues, in 1999. The increase in gross margin percentage was
primarily due to the growth in sales of NSX systems, which have
a higher gross margin than our other products, and a stronger
mix of higher margin system sales within the NSX series.

Selling, General and Administrative.Selling, general and administrative
expenses increased $5.4 million, or 113.2%, to
$10.1 million, or 31.9% of net revenues, in 2000, from
$4.7 million, or 39.3% of net revenues, in 1999. The
increased expense dollars was primarily due to the hiring and
recruiting of additional sales, field service and administrative
employees to support our domestic and international growth,
higher international travel costs resulting from our growth in
Asia and Europe and increased occupancy costs related to a new
facility.

Research and Development.Research and development expenses
increased $4.6 million, or 199.6%, to $6.9 million, or
21.9% of net revenues, in 2000, from $2.3 million, or 19.2%
of net revenues, in 1999. The increase resulted from the hiring
and recruiting of additional engineers, the use of outside
services and the development of product prototypes as we
continued to advance new product initiatives.

Non-recurring expense.Non-recurring expense in 2000 consists
of the write-off of business automation software as a result of
our decision to discontinue the implementation of this software.

Interest income (expense), net.Net interest income in 2000 was $1.0
million, compared to net interest expense of $42,000 in 1999.
The net interest income in 2000 was the result of interest
earned from investing the net proceeds received from our IPO in
June 2000.

Income Taxes.The
provision for income taxes in 2000 was $807,000, or an effective
tax rate of 30.1%, compared to an income tax benefit of $17,500,
or an effective tax rate of 11.7%, in 1999. The low effective
income tax rate in 2000, compared to the federal statutory rate
of 34% plus state and local taxes, was primarily due to the
claiming of federal and state general business credits. The low
effective income tax rate in 1999 was due to a valuation
allowance being recorded against a portion of our operating loss
during 1999.

Liquidity and Capital Resources

Working capital increased to $37.2 million
at December 31, 2001 as compared to $36.9 million at
December 31, 2000. As of December 31, 2001 we had cash
and cash equivalents of $1.5 million, as compared to
$3.1 million at December 31, 2000.

During 2001, net cash used in operating
activities was $1.4 million, which resulted primarily from
increased inventories, prepaid and other current assets and
decreased accounts payable, partially offset by decreased
accounts receivable and an increase in customer deposits. Net
cash used in investing activities was $737,000, due to purchases
of held to maturity securities of $54.7 million and
$2.5 million of additions to property and equipment and
other assets, partially offset by $56.5 million of proceeds
from the redemption of securities held to maturity. Net cash
provided by financing activities was $596,000 from the proceeds
of issuances of common stock in conjunction with the exercise of
stock options by employees and purchases under our employee
stock purchase plan.

During 2000, net cash used in operating
activities was $3.4 million, which resulted primarily from
increased accounts receivable, inventories and prepaid and other
current assets, partially offset by increased accounts payable,
accrued compensation, other accrued liabilities and accrued
income taxes. Net cash used in investing activities was
$28.2 million, due to purchases of held to maturity
securities of $47.8 million and

14



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##### 



$2.0 million of additions to property and
equipment, partially offset by $21.7 million of proceeds
from the maturities of securities held to maturity. Net cash
provided by financing activities was $34.7 million,
including $35.9 million of net proceeds received from the
sale of 3,300,000 shares of common stock in the IPO, partially
offset by the re-payment of $1.2 million of debt.


During 1999, net cash used in operating
activities was $2.4 million, which resulted primarily from
increased accounts receivable and inventories, partially offset
by increased accounts payable and accrued compensation. Net cash
used in investing activities was $747,000 for additions to
property and equipment. Net cash provided by financing
activities was $3.2 million primarily from net proceeds of
$2.0 million from the sale of 824,511 shares of common
stock to outside investors and from $1.0 million of
short-term borrowings.

At December 31, 2001 our principle sources
of liquidity consisted of $25.9 million of cash, cash
equivalents and investments and $5.0 million of available
credit facilities. Our liquidity is affected by many factors,
some of which are based on the normal ongoing operations of our
business, and others of which relate to the uncertainties of
global economies and the cyclical nature of the semiconductor
and microelectronic industries. We have no outstanding debt at
December 31, 2001. Our future commitments are presented in
Note 10 to the consolidated financial statements included in
this Form 10-K. Although liquidity requirements will
fluctuate based on the timing and extent of these factors,
management believes that cash generated from operations,
together with existing cash and investment balances and our line
of credit will be adequate to satisfy our liquidity requirements
for the next 12 months.

Impact of Accounting Standards

In July 2001, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 141; Business
Combinations, and SFAS No. 142; Goodwill and Other
Intangible Assets, which change the accounting for business
combinations and goodwill. SFAS No. 141 requires that the
purchase method of accounting be used for business combinations
initiated after June 30, 2001. Use of the
pooling-of-interests method is prohibited. SFAS No. 142
changes the accounting for goodwill from an amortization method
to an impairment-only approach. Amortization of goodwill,
including goodwill recorded in past business combinations, will
therefore cease upon adoption of the Statement, which for us
will be in January 2002. We do not expect that SFAS No. 141
and SFAS No. 142 will have a material effect on our
consolidated financial statements.

In August 2001, the FASB issued SFAS
No. 144; Accounting for the Impairment or Disposal of
Long-Lived Assets. SFAS No. 144 addresses the financial
accounting and reporting for the impairment or disposal of
long-lived assets and supersedes SFAS No. 121;
Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of. However, this Statement
retains the fundamental provisions of SFAS No. 121 for (a)
recognition and measurement of the impairment of long-lived
assets to be held and used and (b) measurement of
long-lived assets to be disposed of by sale.

SFAS No. 144 also supersedes the accounting
and reporting provisions of APB No. 30; Reporting the
Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions, for the
disposal of a segment of a business. However, this Statement
retains the requirement of APB No. 30 to report
discontinued operations separately from continuing operations
and extends that reporting to a component of an entity that
either has been disposed of or is classified as held for sale.
The provisions of SFAS No. 144 will be effective for us in
January 2002. We do not expect that SFAS No. 144 will have
a material effect on our consolidated financial statements.

Cautionary Statements

Certain statements contained in this
Form 10-K and other written and oral statements made from
time to time by us do not relate strictly to historical or
current facts. As such, they are considered
forward-looking statements which provide current
expectations or forecasts of future events. Such statements can
be identified by the use of terminology such as
anticipate, believe,
estimate, expect, intend,
may,

15



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could, possible,
plan, project, should,
will, forecast and similar words or
expressions. Our forward-looking statements generally relate to
our growth strategies, financial results, product development
and sales efforts. One must carefully consider forward-looking
statements and understand that such statements involve a variety
of risks and uncertainties, known and unknown, and may be
affected by inaccurate assumptions, including, among others,
those discussed below. Consequently, no forward-looking
statement can be guaranteed and actual results may vary
materially. We undertake no obligation to update any
forward-looking statement, but investors are advised to consult
any further disclosures by us on this subject in our filings
with the Securities and Exchange Commission, especially on
Forms 10-K, 10-Q and 8-K (if any), in which we discuss in
more detail various important factors that could cause actual
results to differ from expected or historic results. We note
these factors as permitted by the Private Securities Litigation
Reform Act of 1995. It is not possible to foresee or identify
all such factors. As such, investors should not consider any
list of such factors to be an exhaustive statement of all risks,
uncertainties or potentially inaccurate assumptions.


Global economic and political environments are
important to economic conditions, and long term continued risk
or concerns could affect our business.

Future political or related events similar or
comparable to those in 2001 such as the September 11, 2001
terrorist attacks, or significant or long term reactions
thereto, may significantly affect the willingness or ability of
our customers to visit our facilities or trade shows, review our
systems capabilities and/or purchase or take delivery of
our products, as well as our abilities to visit our customers,
to perform applications studies for our customers, to sell and
deliver solutions, and to service those solutions. Any decline
in willingness or ability of our customers to travel and visit
our facilities, or our ability to travel and visit our
customers, could be a material adverse effect on our business
and the financial condition and results of operations.

The microelectronic industries that we serve
are highly cyclical, and are currently experiencing a severe and
prolonged downturn.

Our primary markets are the semiconductor
equipment industry and the emerging microelectronics equipment
industries including optoelectronics, photonics, MEMS or other
micro machines, micro LCDs, printheads, data storage, disk
drives and other similar devices. Our business depends heavily
upon capital expenditures by manufacturers in these industries.
The semiconductor and microelectronic industries are highly
cyclical, with periods of capacity shortage and periods of
excess capacity; this is historically due to sudden changes in
demand for semiconductor and microelectronic devices. In periods
of excess capacity, there are often drastic changes in the
timing and quantity of capital equipment purchases and
investments in new technology or capacity needs by our
customers, including sharp cuts in purchases of capital
equipment by customers, including our products. The timing,
length and volatility of these periods are difficult to predict,
resulting in pressure on our revenues, gross margin and net
income. In addition to affecting our customers, downturns also
challenge our suppliers, vendors, other partners, as well as our
management, sales, engineering, manufacturing, customer service
and other employees who are vital to our success.

The semiconductor equipment industry as well as
many of the microelectronic industries are currently
experiencing a severe and prolonged downturn. Many industry
sources have indicated that the current semiconductor industry
downturn may be the steepest decline in history. Our management
cannot predict when a recovery will begin or how robust it will
be. There are similarly no accurate or reliable market
predictions from industry sources predicting the timing, length
and strength of a recovery.

In the past, during semiconductor and
microelectronic downturns, customers typically reduce or delay
purchases, and/or delay delivery or cancel orders. As a result,
it is imperative that we maintain an organization able to
quickly and effectively align with market conditions including
bringing our costs structures in line with current industry and
overall market conditions. At the same time, it is imperative
that we continue to serve our existing customers, provide new
and improved solutions for new and existing customers, operate
effectively with our suppliers, and motivate and retain key
employees. If we are, for any reason, unable to achieve any one
or more of the above objectives in an efficient, effective and
timely manner, there could be a material adverse effect on our
business, financial condition and results of operations.
Furthermore, any delays or reductions in

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future purchases of capital equipment or delays
or cancellations of current orders by semiconductor and
microelectronic device manufacturers, for any reason, may have a
material adverse effect on our business and the financial
condition and results of operations.


Our future rate of growth is highly dependent
on the development and growth of the market for semiconductor
and microelectronic test and inspection equipment and the market
acceptance of our products.

We primarily target our products to address the
needs of semiconductor and microelectronic manufacturers for
micro defect inspection. If for any reason the market for
semiconductor and microelectronic test and inspection equipment
fails to grow as we expect, we may be unable to sustain our
growth. In addition, our growth depends upon the adoption of our
products by semiconductor and microelectronic manufacturers. If,
for any reason, these manufacturers do not find our products to
be appropriate for their use, our future growth will be
adversely affected.

Our sales and operating results can fluctuate
significantly from period to period which may adversely affect
the market price of our stock.

Our quarterly and annual operating results are
affected by a wide variety of factors that could adversely
affect sales or operating results or lead to significant
variability in our operating results. In addition, because a
significant portion of our revenue in any particular quarter has
historically come from the sale of a relatively small number of
systems, the loss of any sale could have a significant negative
impact. A variety of factors could cause this variability,
including the following:



| |   |                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------
| |  | order cancellations or delays in orders by
	customers;                                                                                            
|
| |  | the high selling prices of our NSX Series and 3Di
	Series, which typically result in a long sales cycle;                                          
|
| |  | decreases in capital spending by our customers,
	particularly in light of current conditions in the semiconductor
	and microelectronic industries;
|
| |  | new product introductions by our competitors and
	competitive pricing pressures;                                                                  
|
| |  | component shortages resulting in manufacturing
	delays; and                                                                                       
|
| |  | delays in the development, introduction and
	manufacture of our products.                                                                         

We cannot predict the impact of these and other
factors on our revenues and operating results in any future
period. Results of operations in any period, therefore, should
not be considered indicative of the results to be expected for
any future period. Because of this difficulty in predicting
future performance, our operating results may fall below
expectations of securities analysts or investors in some future
quarter or quarters. Our failure to meet these expectations
would likely adversely affect the market price of our common
stock.

One product line accounts for a significant
portion of our sales, consequently, continued market acceptance
of this product line is critical to our success.

Approximately 77% of our 2001 net revenues came
from the sales of our NSX Series. With the introduction of our
new 3Di Series in 2001, we expect the 3Di line to grow as a
percentage of our sales, however, we still expect that the NSX
Series will continue to account for at least a majority of our
net revenues for the next twelve months. Continued market
acceptance of this product line is critical to our success. Any
decline in demand for or failure to achieve continued market
acceptance of this product line or any new version of this
product line, would harm our business.

The market acceptance of our new 3Di Series is
critical to our growth.

Semiconductor and microelectronic equipment and
processes are subject to rapid technological changes and as a
result we recently introduced the new 3Di Series. Our 3Di Series
advances our product offerings into the competitive 3D market
using our proprietary, recently introduced Rapid Confocal Sensor
technology. If

17



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our customers do not accept and integrate our 3Di
Series systems into their operations, our revenue, operating
results or stock price could be negatively impacted.


If we are unable to develop and introduce
successful new products and technologies in a timely manner, our
business will be harmed.

The semiconductor and microelectronic capital
equipment manufacturing business is a highly competitive
business, and the semiconductor and microelectronic equipment
and processes provided are subject to rapid technological
changes. We believe that our future success will depend in part
upon our ability to continue to enhance our existing product
line to meet customer needs and to develop and introduce new
products in a timely manner. We cannot assure you that our
product enhancement efforts to improve and advance products such
as the NSX Series, or our new product development efforts such
as our 3Di Series incorporating our Rapid Confocal Sensor
technology, and 300mm advances, will be successful or that we
will be able to respond effectively to technological change. If
we are unsuccessful, our expenses, revenue, operating results or
stock price could be negatively impacted.

We continue to make and/or review significant
investments in research, development, and engineering in new
technology and/or businesses with new or complementary products,
services and/or technologies, and we are aware of the numerous
risks associated therewith, including but not limited to:
1) diversion of managements attention from day to day
operational matters; 2) lack of synergy, or the inability
to realize expected synergies, 3) failure to commercialize the
new technology or business; and 4) worse-than-expected
performance of the new technology or business. If we are
unsuccessful, our revenue, operating results or stock price
could be negatively impacted.

Our operating results could be negatively
impacted if we are unable to obtain the necessary resources to
invest in our future.

Although the semiconductor and microelectronic
industries are currently in a severe and prolonged downturn, we
intend to prepare for the next up-turn in these industries by
continuing to invest in certain areas of our business.

These investments may result in the need to spend
significant amounts of cash to:



| |   |                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | fund increases in research, development and
	engineering expenses;                                                                                                                                                    
|
| |  | take advantage of unanticipated opportunities,
	such as strategic alliances or other special marketing
	opportunities, acquisitions of complementary businesses or
	assets, or the development of new products; and/or
|
| |  | respond to unanticipated developments, increasing
	customer demands or competitive pressures.                                                                                                                         

If our cash, together with cash available under
our credit facility, is insufficient to meet these cash
requirements, we will need to seek alternative sources of
financing to carry out our growth and operating strategies. We
may not be able to raise needed cash on terms acceptable to us,
or at all. Financing may be on terms that are dilutive or
potentially dilutive. If alternative sources of financing are
required but are insufficient or unavailable, we will be
required to modify our growth and operating plans to the extent
of available funding.

Our market is highly competitive and we may
lose business to larger and better-financed
competitors.

The semiconductor defect inspection equipment
industry is highly competitive in all areas of the world. Many
other domestic and foreign companies participate in the same
market as our NSX and 3Di Series systems, and the industry is
intensely competitive. Our current primary competitors in the
market for semiconductor micro defect inspection equipment are
Semiconductor Technologies & Instruments, Inc., Robotic
Vision Systems, Inc., Toray Industries, Inc., and Electroglas,
Inc. In addition, companies such as KLA-Tencor Corporation and
Applied Materials, Inc., that are currently providing automated
inspection products for the wafer manufacturing and processing
market, may enter our market. Most of these competitors, as well
as other potential competitors, have substantially greater
financial resources and more

18



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extensive engineering, manufacturing, marketing,
and customer support capabilities than we have. Unless we are
able to invest significant financial resources in developing
products and enhancing customer support worldwide, and are able
to gain customer acceptance of our products, we may not be able
to compete effectively.


As we continue to diversify into the evolving and
emerging microelectronic technologies and devices including
optoelectronics, photonics, MEMS or other micro machines, flat
panel display, printheads, data storage, disk drives and other
similar devices, further competitors may enter our markets, or
we may enter the markets of other companies.

Our success depends on attracting and
retaining key personnel.

Our future success will depend in large part upon
our ability to recruit and retain highly skilled technical,
manufacturing, managerial, financial and marketing personnel.
The labor market in which we operate is highly competitive and
as a result, we may not be able to retain and recruit key
personnel. Our failure to hire, retain, or adequately train key
personnel could have a negative impact on our performance.

Our business may be harmed if we fail to
protect our intellectual property rights.

Our success depends in part upon our ability to
obtain intellectual property rights and licenses and to preserve
other intellectual property rights covering our products and our
products under development. To protect these rights, we have
obtained two domestic patents and intend to continue to seek
patents on our inventions when appropriate. As of
December 31, 2001, we also have a variety of pending patent
applications in the United States and internationally. The
process of seeking intellectual property protection can be
time-consuming and expensive. We cannot ensure that:



| |   |                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------
| |  | patents will be issued from currently pending or
	future applications;                                                                               
|
| |  | our existing patents or any new patents will be
	sufficient in scope or strength to provide meaningful protection
	or any commercial advantage to us;
|
| |  | foreign intellectual property laws will protect
	our intellectual property rights; or                                                                
|
| |  | others will not independently develop similar
	products, duplicate our products or design around our technology.                                     

If we do not successfully enforce our
intellectual property rights, our competitive position could
suffer, which could harm our operating results.

We also rely on trade secrets, proprietary
know-how and confidentiality provisions in agreements with
employees, consultants, key customers and vendors to protect our
intellectual property. Other parties may not comply with the
terms of their agreements with us, and we may not be able to
adequately enforce our rights against these people.

Third parties may claim that we are infringing
upon their intellectual property, and we could suffer
significant litigation costs, licensing expenses or be prevented
from selling our products.

Intellectual property rights are uncertain and
involve complex legal and factual questions. We may be
unknowingly infringing upon the intellectual property rights of
others and may be liable for that infringement, which could
result in significant liability for us. If we do infringe upon
the intellectual property rights of others, we could be forced
to either seek a license to those intellectual property rights
or to alter our products so that they no longer infringe. A
license could be very expensive to obtain or may not be
available at all. Similarly, changing our products or processes
to avoid infringing upon the rights of others may be costly or
impractical.

We are responsible for any patent litigation
costs. If we were to become involved in a dispute regarding
intellectual property, whether ours or that of another company,
we may have to participate in legal proceedings. These types of
proceedings may be costly and time-consuming for us, even if we
eventually

19



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prevail. If we do not prevail, we might be forced
to pay significant damages, obtain licenses, modify our products
or processes, stop making products or stop using processes.


Our dependence on a few significant customers
exposes us to operating risks.

Sales to our ten largest customers accounted for
75% of net revenues in 2001, 63% of net revenues in 2000 and 72%
of net revenues in 1999. In 2001, we had two customers each
account for more than ten percent of our business, with one
accounting for almost eighteen percent. Our customers are able
to cancel orders, prior to shipment, with few or no penalties.
If a significant customer reduces orders for any reason, our
revenues, operating results, and financial condition will be
negatively affected. In addition, our ability to increase our
sales will depend in part upon our ability to obtain orders from
new customers for whom there is intense competition.

Our dependence on subcontractors and sole or
limited source suppliers may prevent us from delivering an
acceptable product on a timely basis and could result in
disruption of our operations.

We rely on subcontractors to manufacture many of
the components and subassemblies for our products, and we depend
on single or limited source suppliers for some of our
components. Our reliance on subcontractors gives us little
control over the manufacturing process and exposes us to
significant risks such as inadequate capacity, late delivery,
substandard quality and high costs.

If a supplier were to become unable to provide
parts in the volumes needed or at an acceptable price, we would
have to identify and qualify acceptable replacements from
alternative sources of supply, or manufacture the components
internally. Depending on the part, the process of qualifying
subcontractors and suppliers generally takes between 60 and
180 days. We have no written supply agreements with any of
our single or limited source suppliers and purchase our custom
components through individual purchase orders. If we were unable
to obtain these components in a timely fashion, we may not be
able to meet demands for future shipments. We believe that we
would be able to find alternative solutions if supplies were
unavailable from any of our sole source suppliers, including the
supplier of our image processing component. This may take time
and the disruption would adversely affect our results of
operations.

Our dependence upon international customers
and suppliers may reduce our revenues or impede our ability to
supply products.

International sales have accounted for a
significant portion of our revenues in recent years, and we
expect that the percentage of sales from international customers
will continue to increase. Sales outside of North America
accounted for 44% of our net revenues in 2001, 45% of our net
revenues in 2000, and 37% of our net revenues in 1999. In
addition, we rely on non-U.S. suppliers for several components
of the systems we sell. As a result, a major part of our
revenues and the ability to manufacture our products are subject
to the risks associated with international commerce.
International sales and our relationships with suppliers may be
hurt by many factors, including:



| |   |                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------
| |  | changes in law or policy resulting in burdensome
	government controls, tariffs, restrictions, embargoes or export
	license requirements;
|
| |  | political or economic instability in our target
	international markets;                                                                 
|
| |  | longer payment cycles common in foreign markets;                                                                                        
|
| |  | difficulties in staffing and managing our
	international operations;                                                                    
|
| |  | less favorable foreign intellectual property laws
	making it harder to protect our technology from appropriation by
	competitors; and   
|
| |  | difficulties in collecting our accounts
	receivable because of the geographic distance and different
	legal rules.                      

20



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If our international sales or relationships with
international suppliers are adversely affected by any of these
factors, our financial condition could be adversely affected.

Our operational results could be negatively
impacted by currency fluctuations and other global business
risks.

Our foreign sales are made in U.S. dollars. A
strengthening in the dollar relative to the currencies of those
countries where we do business would increase the prices of our
products as stated in those currencies and hurt our sales in
those countries. If we lower our prices to reflect a change in
exchange rates, our profitability in those markets will
decrease. In the past, there have been significant fluctuations
in the exchange rates between the dollar and the currencies in
the countries where we do business. We have not historically
tried to reduce our exposure to exchange rate fluctuations by
using hedging transactions. However, we may choose to do so in
the future. We may not be able to do so successfully.
Accordingly, we may experience economic loss and a negative
impact on earnings and equity as a result of foreign currency
exchange rate fluctuations.

We are also subject to risks associated with
shipping products outside of the U.S. including shipping delays,
varying business conditions, differing business cultures,
cultural diversities, and export laws, among other risks.

Failure to increase our sales in Asia will
negatively impact our financial performance.

Asia is an important region for the markets we
serve. We expect our dependence upon the Asian market to
increase. In recent years, Asia has experienced serious economic
problems including currency devaluations, debt defaults, lack of
liquidity and recessions. Our revenues depend upon the capital
expenditures of semiconductor manufacturers, many of who have
operations and customers in Asia. Serious economic problems in
Asia would likely result in a significant decrease in the sale
of equipment to the semiconductor industry. If we are unable to
increase our sales in Asia, our future financial condition,
revenues and operating results will be negatively affected.

In addition, we opened an office in Taiwan in
2001 where we will directly sell and service our systems using
our own employees. We believe the semiconductor industry in
Taiwan and surrounding countries have significant sales
potential thus justifying our decision; however should our
predictions be incorrect, our future financial condition,
revenues and operating results will be negatively affected.
Although we believe that the opening of the office will provide
us with more control over our affairs and a direct sales and
service force 100% dedicated to our products, the opening of the
office required a lease of a facility, the hiring of employees,
the formation of a limited liability entity and opening of a
Taiwan branch and other actions all of which may increase our
exposure.

We will rely upon distributors for a
significant portion of our future sales, and a disruption in our
relationships with these distributors could have a negative
impact on our international sales.

A substantial portion of our sales have been made
through independent distributors. We expect that sales through
independent distributors will represent a material portion of
our sales for the next several years. In particular, almost all
of our 2001 sales in Asia, Japan, and Europe were made through
independent distributors. In 2001, sales to our exclusive
distributor in Asia (excluding Japan and Taiwan, since the
opening of our direct sales and service office in 2001)
accounted for 13% of our net revenues, sales to our exclusive
distributor in Japan accounted for 13% of our net revenues and
sales to our distributors in Europe accounted for 3% of our net
revenues. The activities of these distributors are not within
our control. Although we believe that we maintain good relations
with our independent distributors, the relationships may
nevertheless deteriorate in the future. A reduction in the sales
or service efforts or financial viability of any of our
independent distributors, or a termination of our relationships
with them, could harm our sales, our financial results and our
ability to support our customers.

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Any acquisitions we may make could disrupt and
harm our business.

As of the date of this filing on Form 10-K,
we do not have any specific plans or agreements to make any
specific material acquisitions, we plan to pursue acquisitions
of related businesses. Our identification of suitable
acquisition candidates involves risks inherent in assessing the
values, strengths, weaknesses, risks and profitability of
acquisition candidates, including the effects of the possible
acquisition on our business, diversion of our managements
attention and risks associated with unanticipated problems or
latent liabilities. If we are successful in pursuing
acquisitions, we may be required to expend significant funds,
incur additional debt or issue additional securities, which may
negatively affect our results of operations and be dilutive to
our shareholders. If we spend significant funds or incur
additional debt, our ability to obtain financing for working
capital or other purposes could decline and we may be more
vulnerable to economic downturns and competitive pressures. We
cannot guarantee that we will be able to finance acquisitions or
that we will realize any anticipated benefits from acquisitions
that we complete. The process of reviewing and acquiring related
businesses involve numerous risks, including but not limited to:
1) diversion of managements attention from other
operational matters; 2) lack of synergy, or the inability
to realize expected synergies, resulting from the acquisition;
3) failure to commercialize purchased technology; and 4)
acquired intangible assets becoming impaired as a result of
technological advancements or worse-than-expected performance of
the acquired company. Should we successfully acquire another
business, the process of integrating acquired operations into
our existing operations may result in unforeseen operating
difficulties and may require significant financial resources
that would otherwise be available for the ongoing development or
expansion of our existing business. Mergers and acquisitions are
inherently risky and the inability to effectively manage these
risks could materially and adversely affect our business,
financial condition and results of operations.

If a semiconductor or microelectronic
manufacturer is loyal to another semiconductor or
microelectronic equipment supplier, we may be unable to sell our
products to that potential customer, and our sales and market
share could suffer as a result.

We believe that once a semiconductor or
microelectronic device manufacturer has selected one
vendors capital equipment for a production line
application, the manufacturer generally relies upon that capital
equipment and, to the extent possible, subsequent generations of
the same vendors equipment, for the life of the
application. Once a vendors equipment has been installed
in a production line, a semiconductor device manufacturer must
often make substantial technical modifications and may
experience production-line downtime in order to switch to
another vendors equipment. Accordingly, unless our systems
offer performance or cost advantages that outweigh a
customers expense of switching to our systems, it will be
difficult for us to achieve significant sales to that customer
once it has selected another vendors capital equipment for
an application.

Item 7A.     Qualitative
and Quantitative Disclosures about Market Risk

Market Risk

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

Interest Rate Risk

We are exposed to interest rate risk primarily
from investments in cash equivalents and short-term and
long-term marketable debt securities (the Investment
Portfolio). The entire Investment Portfolio is classified
as held to maturity and, accordingly, is recorded on the
consolidated balance sheet at cost, with the amortization of any
purchase discounts or premiums recorded in interest income. The
entire Investment Portfolio is denominated in U.S. dollars. We
do not use derivative financial instruments in the Investment
Portfolio. Due to the short duration of our investment
portfolio, an immediate 10 percent change in interest rates
is not expected to have a material adverse effect on our
near-term financial condition or results of operations.

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Credit Risk

Financial instruments which potentially subject
us to credit risk consist principally of securities in the
Investment Portfolio and trade receivables. We limit credit risk
related to the Investment Portfolio by placing all investments
with high credit quality issuers and limit the amount of
investment with any one issuer. As of December 31, 2001,
95% of the Investment Portfolio consisted of government
securities and corporate commercial paper and bonds with
maturities of one year or less. We limit credit risk associated
with trade receivables by performing ongoing credit evaluations
and believe that there is no additional risk beyond amounts
provided for collection losses to be inherent in trade
receivables.

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Item 8.     Financial
Statements and Supplementary Data

AUGUST TECHNOLOGY CORPORATION

INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS

|                                                                                                      |  |  |    | 
|----------------------------------------------------------------------------------------------------- |  |  | -- | 
|Independent Auditors Report                                                                          |  |  | 25 | 
|Consolidated Balance Sheets as of
	December 31, 2001 and 2000                                         |  |  | 26 | 
|Consolidated Statements of Operations for the
	Years Ended December 31, 2001, 2000 and 1999           |  |  | 27 | 
|Consolidated Statements of Shareholders
	Equity for the Years Ended December 31, 2001, 2000 and 1999 |  |  | 28 | 
|Consolidated Statements of Cash Flows for the
	Years Ended December 31, 2001, 2000 and 1999           |  |  | 29 | 
|Notes to Consolidated Financial Statements                                                            |  |  | 30 | 

24



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##### 



INDEPENDENT AUDITORS REPORT

The Board of Directors and Shareholders

August Technology Corporation:


We have audited the accompanying consolidated
balance sheets of August Technology Corporation and subsidiary
(the Company) as of December 31, 2001 and 2000, and the
related consolidated statements of operations,
shareholders equity, and cash flows for each of the years
in the three-year period ended December 31, 2001. These
consolidated financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.

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

In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of August Technology
Corporation and subsidiary as of December 31, 2001 and
2000, and the results of their operations and their cash flows
for each of the years in the three-year period ended
December 31, 2001, in conformity with accounting principles
generally accepted in the United States of America.



| |             
| | ------------
| | /s/ KPMG LLP

Minneapolis, Minnesota

February 11, 2002


25



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##### 



AUGUST TECHNOLOGY CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)


|                                      |                                                                                                                                  |                                            |       |        |        |  |       |        |        | 
|------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ----- | ------ | ------ |  | ----- | ------ | ------ | 
|                                      |                                                                                                                                  |                                           
|                                      |                                                                                                                                  | December 31,                              
|                                      |                                                                                                                                  |                                           
|                                      |                                                                                                                                  | 2001                                       |       | 2000  
|                                      |                                                                                                                                  |                                            |       |       
|ASSETS                               
|Current assets:                       |                                                                                                                                  |                                            |       |        |        |  |       |       
|                                      | Cash and cash equivalents                                                                                                        |                                            | $     | 1,523  |        |  | $     | 3,103  |       
|                                      | Short-term investments                                                                                                           |                                            |       | 23,196 |        |  |       | 23,604 |       
|                                      | Accounts receivable, net                                                                                                         |                                            |       | 4,737  |        |  |       | 6,880  |       
|                                      | Inventories                                                                                                                      |                                            |       | 9,384  |        |  |       | 8,256  |       
|                                      | Prepaid expenses and other current assets                                                                                        |                                            |       | 2,838  |        |  |       | 1,081  |       
|                                      |                                                                                                                                  |                                            |       |        |        |  |       |       
|                                      |                                                                                                                                  | Total current assets                       |       |        | 41,678 |  |       |        | 42,924 | 
|Property and equipment, net           |                                                                                                                                  |                                            | 3,541 |        |        |  | 2,214 |       
|Long-term investments                 |                                                                                                                                  |                                            | 1,138 |        |        |  | 2,486 |       
|Other assets                          |                                                                                                                                  |                                            | 798   |        |        |  | 273   |       
|                                      |                                                                                                                                  |                                            |       |        |        |  |       |       
|                                      |                                                                                                                                  | Total assets                               |       | $      | 47,155 |  |       | $      | 47,897 | 
|                                      |                                                                                                                                  |                                            |       |        |        |  |       |       
|LIABILITIES AND SHAREHOLDERS
	EQUITY
|Current liabilities:                  |                                                                                                                                  |                                            |       |        |        |  |       |       
|                                      | Accounts payable                                                                                                                 |                                            | $     | 1,641  |        |  | $     | 2,768  |       
|                                      | Accrued compensation                                                                                                             |                                            |       | 615    |        |  |       | 1,256  |       
|                                      | Accrued liabilities                                                                                                              |                                            |       | 536    |        |  |       | 590    |       
|                                      | Accrued income taxes                                                                                                             |                                            |       |       |        |  |       | 846    |       
|                                      | Customer deposits                                                                                                                |                                            |       | 1,715  |        |  |       | 592    |       
|                                      |                                                                                                                                  |                                            |       |        |        |  |       |       
|                                      |                                                                                                                                  | Total current liabilities                  |       |        | 4,507  |  |       |        | 6,052  | 
|Other non-current liabilities         |                                                                                                                                  |                                            | 125   |        |        |  | 160   |       
|                                      |                                                                                                                                  |                                            |       |        |        |  |       |       
|                                      |                                                                                                                                  | Total liabilities                          |       |        | 4,632  |  |       |        | 6,212  | 
|                                      |                                                                                                                                  |                                            |       |        |        |  |       |       
|Commitments (note 10)                 |                                                                                                                                  |                                            |      |        |        |  |      |       
|Shareholders equity:                 |                                                                                                                                  |                                            |       |        |        |  |       |       
|                                      | Common stock, no par value, 42,000,000 shares
	authorized 12,812,164 and 12,633,058 shares issued and
	outstanding, respectively |                                            |       | 41,020 |        |  |       | 39,935 |       
|                                      | Undesignated capital stock, no par value,
	3,000,000 shares authorized, no shares issued or outstanding                          |                                            |       |       |        |  |       |       |       
|                                      | Deferred compensation related to stock options                                                                                   |                                            |       | (192   | )      |  |       | (305   | )     
|                                      | Retained earnings                                                                                                                |                                            |       | 1,704  |        |  |       | 2,055  |       
|                                      | Accumulated other comprehensive loss                                                                                             |                                            |       | (9     | )      |  |       |       |       
|                                      |                                                                                                                                  |                                            |       |        |        |  |       |       
|                                      |                                                                                                                                  | Total shareholders equity                 |       |        | 42,523 |  |       |        | 41,685 | 
|                                      |                                                                                                                                  |                                            |       |        |        |  |       |       
|                                      |                                                                                                                                  | Total liabilities and shareholders equity |       | $      | 47,155 |  |       | $      | 47,897 | 
|                                      |                                                                                                                                  |                                            |       |        |        |  |       |       

See accompanying notes to consolidated financial
statements.

26



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##### 



AUGUST TECHNOLOGY CORPORATION

CONSOLIDATED STATEMENTS OF
OPERATIONS

(In thousands, except per share
amounts)


|                                                                |                         |                          |        |        |   |      |        |        |  |   |        |       |  
|--------------------------------------------------------------- | ----------------------- | ------------------------ | ------ | ------ | - | ---- | ------ | ------ |  | - | ------ | ----- | -
|                                                                |                         |                         
|                                                                |                         | Years Ended December 31,
|                                                                |                         |                         
|                                                                |                         | 2001                     |        | 2000   |   | 1999
|                                                                |                         |                          |        |        |   |     
|Net revenues                                                    |                         | $                        | 29,784 |        |   | $    | 31,666 |        |  | $ | 12,058 |      
|Cost of revenues                                                |                         |                          | 12,039 |        |   |      | 12,594 |        |  |   | 5,110  |      
|                                                                |                         |                          |        |        |   |      |        |        |  |   |        |      
|                                                                | Gross profit            |                          |        | 17,745 |   |      |        | 19,072 |  |   |        | 6,948 |  
|Selling, general and administrative expenses                    |                         |                          | 11,800 |        |   |      | 10,100 |        |  |   | 4,737  |      
|Research and development expenses                               |                         |                          | 7,940  |        |   |      | 6,945  |        |  |   | 2,318  |      
|Non-recurring expenses                                          |                         |                          | 579    |        |   |      | 326    |        |  |   |       |      
|                                                                |                         |                          |        |        |   |      |        |        |  |   |        |      
|                                                                | Operating income (loss) |                          |        | (2,574 | ) |      |        | 1,701  |  |   |        | (107  | )
|Interest income                                                 |                         |                          | 1,427  |        |   |      | 1,078  |        |  |   | 1      |      
|Interest expense                                                |                         |                          |       |        |   |      | (100   | )      |  |   | (43    | )    
|Other expense                                                   |                         |                          | (17    | )      |   |      |       |        |  |   |       |      
|                                                                |                         |                          |        |        |   |      |        |        |  |   |        |      
|Income (loss) before provision for (benefit
	from) income taxes |                         |                          | (1,164 | )      |   |      | 2,679  |        |  |   | (149   | )    
|Provision for (benefit from) income taxes                       |                         |                          | (813   | )      |   |      | 807    |        |  |   | (17    | )    
|                                                                |                         |                          |        |        |   |      |        |        |  |   |        |      
|                                                                | Net income (loss)       |                          | $      | (351   | ) |      | $      | 1,872  |  |   | $      | (132  | )
|                                                                |                         |                          |        |        |   |      |        |        |  |   |        |      
|Net income (loss) per share:                                    |                         |                          |        |        |   |      |        |        |  |   |        |      
|                                                                | Basic                   |                          | $      | (0.03  | ) |      | $      | 0.17   |  |   | $      | (0.02 | )
|                                                                | Diluted                 |                          | $      | (0.03  | ) |      | $      | 0.16   |  |   | $      | (0.02 | )

See accompanying notes to consolidated financial
statements.

27



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##### 



AUGUST TECHNOLOGY CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS
EQUITY

(In thousands, except share amounts)


|                              |                                                                 |                                             |            |        |           |               |        |          |        |               |      |               |   |   |       |       |   |   |    |    |   |   |        |       |        | 
|----------------------------- | --------------------------------------------------------------- | ------------------------------------------- | ---------- | ------ | --------- | ------------- | ------ | -------- | ------ | ------------- | ---- | ------------- | - | - | ----- | ----- | - | - | -- | -- | - | - | ------ | ----- | ------ | 
|                              |                                                                 |                                             |            |        |           |               |        |          |        |              
|                              |                                                                 | Common Stock                                |            |        |           |               |        |          |        |              
|                              |                                                                 |                                             |            |        |           |               |        |          |        |              
|                              |                                                                 | Shares                                      |            |        |           | Deferred      |        |          |        | Accumulated   |      |              
|                              |                                                                 | Issued                                      |            |        |           | Compensation  |        |          |        | Other         |      | Total        
|                              |                                                                 | And                                         |            |        |           | Related To    |        | Retained |        | Comprehensive |      | Shareholders
|                              |                                                                 | Outstanding                                 |            | Amount |           | Stock Options |        | Earnings |        | Loss          |      | Equity       
|                              |                                                                 |                                             |            |        |           |               |        |          |        |               |      |              
|Balances at December 31, 1998 |                                                                 |                                             | 8,323,001  |        |           | $             | 1,097  |          |        | $             |     |               |   | $ | 315   |       |   | $ |   |    |   | $ | 1,412  |      
|                              | Issuances of common stock in conjunction with:                  |                                             |            |        |           |               |        |          |        |               |      |               |   |   |       |       |   |   |    |    |   |   |        |       |       
|                              |                                                                 | Sales to private investors, net of expenses |            |        | 824,511   |               |        |          | 1,987  |               |      |               |  |   |       |       |  |   |    |    |  |   |        |       | 1,987  | 
|                              |                                                                 | Exercise of employee stock options          |            |        | 263       |               |        |          |       |               |      |               |  |   |       |       |  |   |    |    |  |   |        |       |       | 
|                              |                                                                 | Employee bonuses                            |            |        | 16,186    |               |        |          | 75     |               |      |               |  |   |       |       |  |   |    |    |  |   |        |       | 75     | 
|                              | Issuances of stock options to nonemployees                      |                                             |            |       |           |               |        | 5        |        |               |      |              |   |   |       |      |   |   |    |   |   |   |        | 5     |       
|                              | Deferred compensation related to stock option
	grants           |                                             |            |       |           |               |        | 428      |        |               |      | (428          | ) |   |       |      |   |   |    |   |   |   |        |      |       
|                              | Net loss                                                        |                                             |            |       |           |               |        |         |        |               |      |              |   |   |       | (132  | ) |   |    |   |   |   |        | (132  | )     
|                              |                                                                 |                                             |            |        |           |               |        |          |        |               |      |               |   |   |       |       |   |   |    |    |   |   |        |      
|Balances at December 31, 1999 |                                                                 |                                             | 9,163,961  |        |           |               | 3,592  |          |        |               | (428 | )             |   |   | 183   |       |   |   |   |    |   |   | 3,347  |      
|                              | Issuances of common stock in conjunction with:                  |                                             |            |        |           |               |        |          |        |               |      |               |   |   |       |       |   |   |    |    |   |   |        |       |       
|                              |                                                                 | Initial public offering, net of expenses    |            |        | 3,300,000 |               |        |          | 35,860 |               |      |               |  |   |       |       |  |   |    |    |  |   |        |       | 35,860 | 
|                              |                                                                 | Exercises of employee stock options         |            |        | 150,592   |               |        |          | 145    |               |      |               |  |   |       |       |  |   |    |    |  |   |        |       | 145    | 
|                              |                                                                 | Employee stock purchase plan                |            |        | 18,505    |               |        |          | 203    |               |      |               |  |   |       |       |  |   |    |    |  |   |        |       | 203    | 
|                              | Tax benefit from stock options exercised                        |                                             |            |       |           |               |        | 112      |        |               |      |              |   |   |       |      |   |   |    |   |   |   |        | 112   |       
|                              | Issuances of stock options to nonemployees                      |                                             |            |       |           |               |        | 48       |        |               |      |              |   |   |       |      |   |   |    |   |   |   |        | 48    |       
|                              | Amortization of deferred compensation related to
	stock options |                                             |            |       |           |               |        | (25      | )      |               |      | 123           |   |   |       |      |   |   |    |   |   |   |        | 98    |       
|                              | Net income                                                      |                                             |            |       |           |               |        |         |        |               |      |              |   |   |       | 1,872 |   |   |    |   |   |   |        | 1,872 |       
|                              |                                                                 |                                             |            |        |           |               |        |          |        |               |      |               |   |   |       |       |   |   |    |    |   |   |        |      
|Balances at December 31, 2000 |                                                                 |                                             | 12,633,058 |        |           |               | 39,935 |          |        |               | (305 | )             |   |   | 2,055 |       |   |   |   |    |   |   | 41,685 |      
|                              | Issuances of common stock in conjunction with:                  |                                             |            |        |           |               |        |          |        |               |      |               |   |   |       |       |   |   |    |    |   |   |        |       |       
|                              |                                                                 | Exercises of employee stock options         |            |        | 150,946   |               |        |          | 307    |               |      |               |  |   |       |       |  |   |    |    |  |   |        |       | 307    | 
|                              |                                                                 | Employee stock purchase plan                |            |        | 28,160    |               |        |          | 289    |               |      |               |  |   |       |       |  |   |    |    |  |   |        |       | 289    | 
|                              | Tax benefit from stock options exercised                        |                                             |            |       |           |               |        | 501      |        |               |      |              |   |   |       |      |   |   |    |   |   |   |        | 501   |       
|                              | Issuances of stock options to nonemployees                      |                                             |            |       |           |               |        | 8        |        |               |      |              |   |   |       |      |   |   |    |   |   |   |        | 8     |       
|                              | Amortization of deferred compensation related to
	stock options |                                             |            |       |           |               |        | (20      | )      |               |      | 113           |   |   |       |      |   |   |    |   |   |   |        | 93    |       
|                              | Foreign currency translation adjustment                         |                                             |            |       |           |               |        |         |        |               |      |              |   |   |       |      |   |   |    | (9 | ) |   |        | (9    | )     
|                              | Net loss                                                        |                                             |            |       |           |               |        |         |        |               |      |              |   |   |       | (351  | ) |   |    |   |   |   |        | (351  | )     
|                              |                                                                 |                                             |            |        |           |               |        |          |        |               |      |               |   |   |       |       |   |   |    |    |   |   |        |      
|Balances at December 31, 2001 |                                                                 |                                             | 12,812,164 |        |           | $             | 41,020 |          |        | $             | (192 | )             |   | $ | 1,704 |       |   | $ | (9 | )  |   | $ | 42,523 |      
|                              |                                                                 |                                             |            |        |           |               |        |          |        |               |      |               |   |   |       |       |   |   |    |    |   |   |        |      

See accompanying notes to consolidated financial
statements.

28



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##### 



AUGUST TECHNOLOGY CORPORATION

CONSOLIDATED STATEMENTS OF CASH
FLOWS

(In thousands)


|                                                                                      |                                                                                                                  |                                           |                                           |         |        |        |       |         |        |         |      |       |        |        |  
|------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------- | ----------------------------------------- | ----------------------------------------- | ------- | ------ | ------ | ----- | ------- | ------ | ------- | ---- | ----- | ------ | ------ | -
|                                                                                      |                                                                                                                  |                                          
|                                                                                      |                                                                                                                  | Years Ended December 31,                 
|                                                                                      |                                                                                                                  |                                          
|                                                                                      |                                                                                                                  | 2001                                      |                                           | 2000    |        | 1999  
|                                                                                      |                                                                                                                  |                                           |                                           |         |        |       
|Cash flows from operating activities:                                                 |                                                                                                                  |                                           |                                           |         |        |        |       |         |        |         |      |      
|Net income (loss)                                                                     |                                                                                                                  | $                                         | (351                                      | )       |        | $      | 1,872 |         |        | $       | (132 | )    
|Adjustments to reconcile net income
	(loss) to net cash used in operating activities: |                                                                                                                  |                                           |                                           |         |        |        |       |         |        |         |      |      
|                                                                                      | Depreciation and amortization                                                                                    |                                           |                                           | 934     |        |        |       | 363     |        |         |      | 151   |       
|                                                                                      | Deferred income taxes                                                                                            |                                           |                                           | (662    | )      |        |       | (178    | )      |         |      | (67   | )     
|                                                                                      | Provision for doubtful accounts                                                                                  |                                           |                                           | 157     |        |        |       | 220     |        |         |      | 31    |       
|                                                                                      | Amortization of deferred compensation related to
	stock options                                                  |                                           |                                           | 93      |        |        |       | 98      |        |         |      |      |       
|                                                                                      | Loss on disposition of assets                                                                                    |                                           |                                           | 17      |        |        |       |        |        |         |      |      |       
|                                                                                      | Issuances of stock options to nonemployees                                                                       |                                           |                                           | 8       |        |        |       | 48      |        |         |      | 5     |       
|                                                                                      | Write-off of assets                                                                                              |                                           |                                           |        |        |        |       | 326     |        |         |      |      |       
|                                                                                      | Accrued lease obligation                                                                                         |                                           |                                           |        |        |        |       | 106     |        |         |      | 129   |       
|                                                                                      | Issuances of common stock to employees                                                                           |                                           |                                           |        |        |        |       |        |        |         |      | 75    |       
|                                                                                      | Changes in operating assets and liabilities:                                                                     |                                           |                                           |         |        |        |       |         |        |         |      |       |       
|                                                                                      |                                                                                                                  | Accounts receivable                       |                                           |         | 1,986  |        |       |         | (3,981 | )       |      |       | (1,866 | )     
|                                                                                      |                                                                                                                  | Inventories                               |                                           |         | (1,128 | )      |       |         | (5,796 | )       |      |       | (1,437 | )     
|                                                                                      |                                                                                                                  | Prepaid expenses and other current assets |                                           |         | (1,213 | )      |       |         | (861   | )       |      |       | (66    | )     
|                                                                                      |                                                                                                                  | Accounts payable                          |                                           |         | (1,127 | )      |       |         | 1,970  |         |      |       | 215    |       
|                                                                                      |                                                                                                                  | Accrued compensation                      |                                           |         | (641   | )      |       |         | 696    |         |      |       | 455    |       
|                                                                                      |                                                                                                                  | Other accrued liabilities                 |                                           |         | (41    | )      |       |         | 396    |         |      |       | (4     | )     
|                                                                                      |                                                                                                                  | Accrued income taxes                      |                                           |         | (591   | )      |       |         | 903    |         |      |       | 31     |       
|                                                                                      |                                                                                                                  | Customer deposits                         |                                           |         | 1,123  |        |       |         | 380    |         |      |       | 46     |       
|                                                                                      |                                                                                                                  |                                           |                                           |         |        |        |       |         |        |         |      |      
|                                                                                      |                                                                                                                  |                                           | Net cash used in operating activities     |         |        | (1,436 | )     |         |        | (3,438  | )    |       |        | (2,434 | )
|                                                                                      |                                                                                                                  |                                           |                                           |         |        |        |       |         |        |         |      |      
|Cash flows from investing activities:                                                 |                                                                                                                  |                                           |                                           |         |        |        |       |         |        |         |      |      
|                                                                                      | Proceeds from maturities of securities held to
	maturity                                                         |                                           |                                           | 56,471  |        |        |       | 21,741  |        |         |      |      |       
|                                                                                      | Purchases of securities held to maturity                                                                         |                                           |                                           | (54,715 | )      |        |       | (47,831 | )      |         |      |      |       
|                                                                                      | Purchases of property and equipment                                                                              |                                           |                                           | (2,245  | )      |        |       | (1,982  | )      |         |      | (747  | )     
|                                                                                      | Investment in other assets                                                                                       |                                           |                                           | (248    | )      |        |       | (118    | )      |         |      |      |       
|                                                                                      |                                                                                                                  |                                           |                                           |         |        |        |       |         |        |         |      |      
|                                                                                      |                                                                                                                  |                                           | Net cash used in investing activities     |         |        | (737   | )     |         |        | (28,190 | )    |       |        | (747   | )
|                                                                                      |                                                                                                                  |                                           |                                           |         |        |        |       |         |        |         |      |      
|Cash flows from financing activities:                                                 |                                                                                                                  |                                           |                                           |         |        |        |       |         |        |         |      |      
|                                                                                      | Net proceeds from issuances of common stock                                                                      |                                           |                                           | 596     |        |        |       | 36,208  |        |         |      | 1,987 |       
|                                                                                      | Proceeds from (payments of) short term debt, net                                                                 |                                           |                                           |        |        |        |       | (1,223  | )      |         |      | 1,033 |       
|                                                                                      | Checks issued in excess of bank balance                                                                          |                                           |                                           |        |        |        |       | (254    | )      |         |      | 161   |       
|                                                                                      |                                                                                                                  |                                           |                                           |         |        |        |       |         |        |         |      |      
|                                                                                      |                                                                                                                  |                                           | Net cash provided by financing activities |         |        | 596    |       |         |        | 34,731  |      |       |        | 3,181  |  
|                                                                                      |                                                                                                                  |                                           |                                           |         |        |        |       |         |        |         |      |      
|Effect of exchange rates on cash and cash
	equivalents                                |                                                                                                                  |                                           | (3                                        | )       |        |        |      |         |        |         |     |      
|                                                                                      |                                                                                                                  |                                           |                                           |         |        |        |       |         |        |         |      |      
|Net increase (decrease) in cash and cash
	equivalents                                 |                                                                                                                  |                                           | (1,580                                    | )       |        |        | 3,103 |         |        |         |     |      
|Cash and cash equivalents at beginning of year                                        |                                                                                                                  |                                           | 3,103                                     |         |        |        |      |         |        |         |     |      
|                                                                                      |                                                                                                                  |                                           |                                           |         |        |        |       |         |        |         |      |      
|Cash and cash equivalents at end of year                                              |                                                                                                                  | $                                         | 1,523                                     |         |        | $      | 3,103 |         |        | $       |     |      
|                                                                                      |                                                                                                                  |                                           |                                           |         |        |        |       |         |        |         |      |      
|Supplemental cash flow information:                                                   |                                                                                                                  |                                           |                                           |         |        |        |       |         |        |         |      |      
|                                                                                      | Cash paid for interest                                                                                           |                                           | $                                         |        |        |        | $     | 100     |        |         | $    | 43    |       
|                                                                                      | Cash paid for income taxes, net of refunds                                                                       |                                           | $                                         | 1,834   |        |        | $     | 88      |        |         | $    | 18    |       
|Non-cash transactions:                                                                |                                                                                                                  |                                           |                                           |         |        |        |       |         |        |         |      |      
|                                                                                      | The Company recorded an increase to
	shareholders equity related to the tax benefit of stock
	options exercised |                                           | $                                         | 501     |        |        | $     | 112     |        |         | $    |      |       

See accompanying notes to consolidated financial
statements.

29



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##### 



AUGUST TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

(In thousands, except per share
amounts)


Note 1  Nature of Business and
Summary of Significant Accounting Policies

Nature of
Business

August Technology Corporation (the
Company) is a worldwide leader in the research,
design, development, manufacture, marketing, sales, distribution
and service of automated micro defect inspection systems used in
the manufacture of semiconductor devices as well as the emerging
markets for microelectronic devices. The Companys systems
automate the inspection process, allowing manufacturers to
inspect 100% of their wafers or die, while providing powerful
information that manufacturers can use to increase yield and
productivity. The Company has sold these systems worldwide to
major semiconductor manufacturers, as well as manufacturing
companies serving the microelectronic markets.

Principles of
Consolidation

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

Use of
Estimates

Management uses estimates and assumptions in
preparing financial statements in accordance with generally
accepted accounting principles. Those estimates and assumptions
affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported revenues and expenses
during the reporting period. Estimates are used for, but not
limited to: allocation of revenues in multiple element
arrangements, allowance for doubtful accounts, inventory
valuation, depreciable lives of assets, useful lives of
intangible assets and taxes. Future events and their effects
cannot be perceived with certainty. As a result, the estimates
used in preparation of the financial statements will change as
new events occur, as additional information is obtained and as
the Companys operating environment changes. Actual results
could differ from those estimates.

Cash and Cash
Equivalents

Cash and cash equivalents include highly liquid
debt instruments with original maturities of 90 days or
less when purchased.

Investments

Investments consist of marketable debt
instruments, which were classified at the time of purchase as
held-to-maturity due to the Companys intent and ability to
hold the investments to maturity. Held-to-maturity securities
are recorded at cost with corresponding premiums or discounts
amortized over the life of the investment to interest income.
Short-term investments mature in less than one year. Long-term
investments have maturities of more than one year.

Fair Value of
Financial Instruments

The carrying amount of cash and cash equivalents,
accounts receivable, investments and accounts payable
approximates fair value as of December 31, 2001 and 2000.

30



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##### 



AUGUST TECHNOLOGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Inventories

Inventories are stated at the lower of cost
(first-in, first-out) or market.

Property and
Equipment

Property and equipment is stated at cost and is
depreciated over the estimated useful lives of the respective
assets. The estimated useful lives range from two to seven
years. Leasehold improvements are amortized using the
straight-line method over the lesser of the estimated useful
lives or lease terms.

Capitalized
Software Development Costs

Software development costs incurred subsequent to
the establishment of technological feasibility, which is
demonstrated by the completion of a working model, through
general release of the products are capitalized. Capitalized
costs are amortized over the lesser of the estimated sales of
the product or the straight-line method over a period of three
years. The Company reviews the carrying value of software
development costs regularly and a loss is recognized when the
net realizable value falls below the unamortized cost.
Capitalized software development costs at December 31, 2001
and 2000 were $260 and $12, respectively. Accumulated
amortization at December 31, 2001 and 2000 were $37 and
none, respectively.

Impairment of
Long Lived Assets

The Company reviews long-lived assets for
impairment whenever events or changes in circumstances indicate
that the carrying amount of the assets may not be fully
recoverable or the useful lives of these assets are no longer
appropriate. Each impairment test is based on a comparison of
the carrying amount of an asset to future net undiscounted cash
flows. If an impairment is indicated, the asset is written down
to its estimated fair value on a discounted cash flow basis.

Concentrations
of Credit Risk

Financial instruments, which potentially subject
the Company to credit risk, consist principally of investments
in cash equivalents and short-term and long-term debt
obligations and trade receivables. The Company limits credit
risk by placing all investments with high credit quality issuers
and limits the amount of investment with any one issuer. The
Company limits credit risk associated with trade receivables by
performing ongoing credit evaluations and believes that there is
no additional risk, beyond amounts provided for collection
losses, to be inherent in trade receivables.

Income
Taxes

Deferred income taxes are recognized for the
difference between the financial statement carrying amounts and
the tax basis of existing assets and liabilities. Deferred
income taxes are recorded at the tax rates expected to be in
effect when amounts are to be included in future taxable income.

Comprehensive
Income (Loss)

Comprehensive income (loss) represents the
change in equity during a period from transactions and other
events and circumstances excluding transactions resulting from
investment by shareholders and distribution to shareholders.

Foreign
Currency Translation

Assets and liabilities of the Companys
Taiwan subsidiary are translated at year-end exchange rates, and
equity accounts are translated at historical rates. Income and
expense accounts are translated at the average

31



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##### 



AUGUST TECHNOLOGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

exchange rate for the year. The resulting
translation adjustment is excluded from operations and
accumulated as a separate component of shareholders equity.

Stock-based
Compensation

The Company applies Accounting Principles Board
Opinion (APB) No. 25, Accounting for Stock Issued
to Employees, and related interpretations in accounting for
stock-based compensation. The Company has adopted the pro forma
disclosure requirements under Statement of Financial Accounting
Standards (SFAS) No. 123, Accounting and Disclosure
of Stock-based Compensation.

Stock-based
Payments to Nonemployees

The Company recognizes expense for stock options
issued to nonemployees based upon the fair value of the
consideration received or the fair value of the equity
instruments issued in accordance with SFAS No. 123.

Revenue
Recognition

The Company derives revenues from the sale of
systems, spare parts and services.

System Sales  Established Products:The Company requires customers,
excluding the Companys distributors, that have new
inspection applications to complete pre-shipment authorization
testing of purchased systems at the Companys facility
prior to shipment. During this testing, the customer verifies
that the system meets their specifications and authorizes
shipment. When the customer has already accepted a previous
system, with the same specifications, for the same application,
the Company does not require pre-shipment authorization testing.

Sales of established products are accounted for
as multiple-element arrangements. Under this method, the total
value is allocated first to undelivered elements, such as
installation, based on their fair values, with the remainder
being allocated to system revenue. System revenue is recognized
once the product has shipped, title and risk of loss have
transferred to the customer and collection of the resulting
receivable is probable. The Company does not deem installation
to be essential to the functionality of its systems as it
does not involve altering the systems features or
capabilities or the building of complex interfaces.

System Sales  New Products:Revenues related to sales of systems
that have not been demonstrated to meet customer specifications
prior to shipment are recognized once title and risk of loss
have transferred to the customer, installation has occurred, and
collection of the resulting receivable is probable.

Spare parts revenue:Spare parts revenue is recognized when
the parts have been shipped, title and risk of loss have
transferred to the customer and collection of the resulting
receivable is probable.

Service revenue:Service revenues are recognized after
the services are performed and collection of the resulting
receivable is probable. Revenues from maintenance contracts are
recognized ratably over the period of the contract. Service
revenues were insignificant during the years ended
December 31, 2001, 2000 and 1999.

The Companys distributors are not granted
price protection. Sales to all customers and distributors are
final and no right of return after shipment exists.

Unbilled revenue represents revenue that has been
earned for equipment shipped but not billed due to the payment
terms of the customer order.

32



---



##### 



AUGUST TECHNOLOGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Advertising
Costs

Advertising costs are expensed as incurred.

Research and
Development

Research and development costs are expensed as
incurred.

Non-recurring
Expenses

During 2001, the Company made a $348 termination
of agreement payment to its distributor in Taiwan, as a
result of the Companys decision to sell directly to
customers in Taiwan. The Company also paid $231 of termination
benefits to 41 employees related to a reduction in
workforce which affected all departments within the Company and
was implemented in response to the downturn in the semiconductor
and related industries.

During 2000, as a result of the Companys
decision to discontinue the implementation of certain internal
business automation software, the Company wrote-off $326
previously capitalized.

Net Income
(Loss) Per Share

Basic net income (loss) per share excludes
dilution and is computed by dividing income (loss) available to
common shareholders by the weighted average number of common
shares outstanding for the period. Diluted net income (loss) per
share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were
exercised or converted into common stock. When there is a net
loss, other potentially dilutive securities are not included in
the calculation of net loss per share since their inclusion
would be anti-dilutive.

Reclassifications

Certain prior year amounts have been reclassified
to conform to the 2001 presentation.

New
Accounting Pronouncements

In July 2001, the Financial Accounting Standards
Board (FASB) issued SFAS No. 141; Business
Combinations, and SFAS No. 142; Goodwill and Other
Intangible Assets, which change the accounting for business
combinations and goodwill. SFAS No. 141 requires that the
purchase method of accounting be used for business combinations
initiated after June 30, 2001. Use of the
pooling-of-interests method is prohibited. SFAS No. 142
changes the accounting for goodwill from an amortization method
to an impairment-only approach. Amortization of goodwill,
including goodwill recorded in past business combinations, will
therefore cease upon adoption of the Statement, which for the
Company will be in January 2002. The Company does not expect
that SFAS No. 141 and SFAS No. 142 will have a
material effect on its consolidated financial statements.

In August 2001, the FASB issued SFAS
No. 144; Accounting for the Impairment or Disposal of
Long-Lived Assets. SFAS No. 144 addresses the financial
accounting and reporting for the impairment or disposal of
long-lived assets and supersedes SFAS No. 121;
Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of. However, this statement
retains the fundamental provisions of SFAS No. 121 for (a)
recognition and measurement of the impairment of long-lived
assets to be held and used and (b) measurement of
long-lived assets to be disposed of by sale.

SFAS No. 144 also supersedes the accounting
and reporting provisions of APB No. 30; Reporting the
Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions, for the
disposal of a segment of a business. However, this Statement
retains the requirement of APB No. 30 to report
discontinued operations separately

33



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##### 



AUGUST TECHNOLOGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

from continuing operations and extends that
reporting to a component of an entity that either has been
disposed of or is classified as held for sale. The provisions of
SFAS No. 144 will be effective for the Company in January 2002.
The Company does not expect that SFAS No. 144 will have a
material effect on its consolidated financial statements.

Note 2  Investments

Short-term and long-term investments consisted of
the following:

|                                      |                  |                           |   |        |        |  |   |        |        | 
|------------------------------------- | ---------------- | ------------------------- | - | ------ | ------ |  | - | ------ | ------ | 
|                                      |                  |                          
|                                      |                  | December 31,             
|                                      |                  |                          
|                                      |                  | 2001                      |   | 2000  
|                                      |                  |                           |   |       
|Due within one year:                  |                  |                           |   |        |        |  |   |       
|                                      | Corporate notes  |                           | $ | 14,518 |        |  | $ | 14,516 |       
|                                      | Government notes |                           |   | 8,678  |        |  |   | 5,618  |       
|                                      | Commercial paper |                           |   |       |        |  |   | 3,470  |       
|                                      |                  |                           |   |        |        |  |   |       
|                                      |                  | Total due within one year |   |        | 23,196 |  |   |        | 23,604 | 
|Due after one year through two years: |                  |                           |   |        |        |  |   |       
|                                      | Corporate notes  |                           |   | 1,138  |        |  |   | 2,486  |       
|                                      |                  |                           |   |        |        |  |   |       
|                                      |                  | Total investments         |   | $      | 24,334 |  |   | $      | 26,090 | 
|                                      |                  |                           |   |        |        |  |   |       

Short-term and long-term investments are carried
at amortized cost.

Note 3  Accounts
Receivable

Accounts receivable consisted of the following:

|                                |                          |              |       |       |  |   |       |       | 
|------------------------------- | ------------------------ | ------------ | ----- | ----- |  | - | ----- | ----- | 
|                                |                          |             
|                                |                          | December 31,
|                                |                          |             
|                                |                          | 2001         |       | 2000 
|                                |                          |              |       |      
|Billed receivables              |                          | $            | 4,640 |       |  | $ | 6,269 |      
|Unbilled revenue                |                          |              | 499   |       |  |   | 866   |      
|                                |                          |              |       |       |  |   |       |      
|                                |                          |              | 5,139 |       |  |   | 7,135 |      
|Allowance for doubtful accounts |                          |              | (402  | )     |  |   | (255  | )    
|                                |                          |              |       |       |  |   |       |      
|                                | Accounts receivable, net |              | $     | 4,737 |  |   | $     | 6,880 | 
|                                |                          |              |       |       |  |   |       |      

Note 4  Inventories

Inventories consisted of the following:

|                                             |             |              |       |       |  |   |       |       | 
|-------------------------------------------- | ----------- | ------------ | ----- | ----- |  | - | ----- | ----- | 
|                                             |             |             
|                                             |             | December 31,
|                                             |             |             
|                                             |             | 2001         |       | 2000 
|                                             |             |              |       |      
|Raw materials                                |             | $            | 3,118 |       |  | $ | 3,393 |      
|Work in process                              |             |              | 779   |       |  |   | 1,013 |      
|Finished goods                               |             |              | 4,455 |       |  |   | 3,850 |      
|Inventory at customers under purchase orders |             |              | 1,032 |       |  |   |      |      
|                                             |             |              |       |       |  |   |       |      
|                                             | Inventories |              | $     | 9,384 |  |   | $     | 8,256 | 
|                                             |             |              |       |       |  |   |       |      

Inventory at customers under purchase orders
represents systems that have shipped under the terms of a
customer purchase order, but have not yet qualified for revenue
recognition as the systems had not met customer specifications
prior to shipment.

34



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##### 



AUGUST TECHNOLOGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note 5  Property and
Equipment

Property and equipment consisted of the following:

|                                                |                             |              |        |       |  |   |       |       | 
|----------------------------------------------- | --------------------------- | ------------ | ------ | ----- |  | - | ----- | ----- | 
|                                                |                             |             
|                                                |                             | December 31,
|                                                |                             |             
|                                                |                             | 2001         |        | 2000 
|                                                |                             |              |        |      
|Furniture and equipment                         |                             | $            | 2,582  |       |  | $ | 1,453 |      
|Computer equipment                              |                             |              | 890    |       |  |   | 770   |      
|Computer software                               |                             |              | 1,227  |       |  |   | 537   |      
|Leasehold improvements                          |                             |              | 389    |       |  |   | 110   |      
|                                                |                             |              |        |       |  |   |       |      
|                                                |                             |              | 5,088  |       |  |   | 2,870 |      
|Less: accumulated depreciation and amortization |                             |              | (1,547 | )     |  |   | (656  | )    
|                                                |                             |              |        |       |  |   |       |      
|                                                | Property and equipment, net |              | $      | 3,541 |  |   | $     | 2,214 | 
|                                                |                             |              |        |       |  |   |       |      

Depreciation expense for the years ended
December 31, 2001, 2000 and 1999 was $897, $363 and $151,
respectively.

Note 6  Income
Taxes

The provision for (benefit from) income taxes
consisted of the following:

|                                                |         |                          |      |      |   |      |      |      |   |   |     |     |  
|----------------------------------------------- | ------- | ------------------------ | ---- | ---- | - | ---- | ---- | ---- | - | - | --- | --- | -
|                                                |         |                         
|                                                |         | Years Ended December 31,
|                                                |         |                         
|                                                |         | 2001                     |      | 2000 |   | 1999
|                                                |         |                          |      |      |   |     
|Current income tax expense (benefit):           |         |                          |      |      |   |      |      |      |   |   |     |    
|                                                | Federal |                          | $    | (152 | ) |      | $    | 960  |   |   | $   | 45  |  
|                                                | State   |                          |      | 1    |   |      |      | 25   |   |   |     | 5   |  
|                                                |         |                          |      |      |   |      |      |      |   |   |     |    
|                                                |         |                          | (151 | )    |   |      | 985  |      |   |   | 50  |    
|Deferred income tax benefit:                    |         |                          |      |      |   |      |      |      |   |   |     |    
|                                                | Federal |                          |      | (468 | ) |      |      | (160 | ) |   |     | (57 | )
|                                                | State   |                          |      | (194 | ) |      |      | (18  | ) |   |     | (10 | )
|                                                |         |                          |      |      |   |      |      |      |   |   |     |    
|                                                |         |                          | (662 | )    |   |      | (178 | )    |   |   | (67 | )  
|                                                |         |                          |      |      |   |      |      |      |   |   |     |    
|Total provision for (benefit from) income taxes |         | $                        | (813 | )    |   | $    | 807  |      |   | $ | (17 | )  
|                                                |         |                          |      |      |   |      |      |      |   |   |     |    

35



---



##### 



AUGUST TECHNOLOGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

A reconciliation of the expected federal income
taxes at the statutory rate of 34% to the actual provision for
(benefit from) income taxes is as follows:

|                                                        |                                                  |                          |      |      |   |      |      |     |  |   |     |     |  
|------------------------------------------------------- | ------------------------------------------------ | ------------------------ | ---- | ---- | - | ---- | ---- | --- |  | - | --- | --- | -
|                                                        |                                                  |                         
|                                                        |                                                  | Years Ended December 31,
|                                                        |                                                  |                         
|                                                        |                                                  | 2001                     |      | 2000 |   | 1999
|                                                        |                                                  |                          |      |      |   |     
|Expected federal tax expense (benefit)                  |                                                  | $                        | (396 | )    |   | $    | 911  |     |  | $ | (51 | )  
|State tax expense (benefit), net of federal tax
	effect |                                                  |                          | (127 | )    |   |      | 5    |     |  |   | (4  | )  
|General business credits                                |                                                  |                          | (208 | )    |   |      | (146 | )   |  |   |    |    
|Nondeductible expenses                                  |                                                  |                          | 86   |      |   |      | 66   |     |  |   | 25  |    
|Extraterritorial income exclusion                       |                                                  |                          | (97  | )    |   |      |     |     |  |   |    |    
|Tax exempt income                                       |                                                  |                          | (81  | )    |   |      | (6   | )   |  |   |    |    
|Change in valuation allowance                           |                                                  |                          |     |      |   |      | (23  | )   |  |   | 23  |    
|Cost (benefit) of graduated tax rates                   |                                                  |                          | 10   |      |   |      |     |     |  |   | (10 | )  
|                                                        |                                                  |                          |      |      |   |      |      |     |  |   |     |    
|                                                        | Actual provision for (benefit from) income taxes |                          | $    | (813 | ) |      | $    | 807 |  |   | $   | (17 | )
|                                                        |                                                  |                          |      |      |   |      |      |     |  |   |     |    

Deferred taxes consisted of the following:

|                               |                                     |                                   |     |      |       |   |     |     |     | 
|------------------------------ | ----------------------------------- | --------------------------------- | --- | ---- | ----- | - | --- | --- | --- | 
|                               |                                     |                                  
|                               |                                     | December 31,                     
|                               |                                     |                                  
|                               |                                     | 2001                              |     | 2000
|                               |                                     |                                   |     |     
|Current deferred tax assets:   |                                     |                                   |     |      |       |   |     |    
|                               | Allowance for doubtful accounts     |                                   | $   | 149  |       |   | $   | 93  |    
|                               | Compensation accrual                |                                   |     | 71   |       |   |     | 69  |    
|                               | Inventory reserve                   |                                   |     | 66   |       |   |     | 55  |    
|                               | Warranty accrual                    |                                   |     | 55   |       |   |     | 46  |    
|                               | Prepaid expenses                    |                                   |     | (8   | )     |   |     |    |    
|                               | Accrued lease obligation            |                                   |     | 11   |       |   |     | 19  |    
|                               |                                     |                                   |     |      |       |   |     |    
|                               |                                     | Total current deferred tax assets |     |      | 344   |   |     |     | 282 | 
|Long-term deferred tax assets: |                                     |                                   |     |      |       |   |     |    
|                               | General business credits            |                                   |     | 596  |       |   |     |    |    
|                               | Alternative minimum tax credits     |                                   |     | 76   |       |   |     |    |    
|                               | State net operating loss carryovers |                                   |     | 49   |       |   |     |    |    
|                               | Accrued lease obligation            |                                   |     | 46   |       |   |     | 41  |    
|                               |                                     |                                   |     |      |       |   |     |    
|                               |                                     | Total gross deferred tax assets   |     |      | 1,111 |   |     |     | 323 | 
|Deferred tax liabilities:      |                                     |                                   |     |      |       |   |     |    
|                               | Property and equipment              |                                   |     | (215 | )     |   |     | (89 | )  
|                               |                                     |                                   |     |      |       |   |     |    
|Net deferred tax assets        |                                     | $                                 | 896 |      |       | $ | 234 |    
|                               |                                     |                                   |     |      |       |   |     |    

At December 31, 2001, the Company had net
operating loss carryforwards for state income tax purposes which
are available to offset approximately $49 of future state
regular income taxes through 2016. In addition, the Company had
general business tax credits for federal and state purposes of
approximately $596, which are available to reduce future federal
and state regular income taxes through 2014.

In assessing the recoverability of deferred tax
assets, management considers whether it is more likely than not
that some portion or all of the deferred tax assets will be
realized. The ultimate realization of deferred tax assets is
dependent upon carry back to prior periods and upon the
generation of future taxable income during the periods in which
those temporary differences become deductible. Management
considers the scheduled

36



---



##### 



AUGUST TECHNOLOGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

reversal of deferred tax liabilities, carry back
potential and projected future taxable income and tax planning
strategies in making this assessment.

Note 7  Short-Term
Debt

On August 10, 2000, the Company amended and
restated the terms of its revolving credit line agreement, which
was previously amended in March 2000, to increase the allowable
borrowings to $5,000 and extend the agreement through May 2002.
The amendment removed the limitation as to availability based
upon accounts receivable and inventory balances. Interest is
payable monthly at the 30-day LIBOR rate plus 2.25%. The amended
agreement contains the same financial covenants as the original
agreement, which include levels of tangible net worth, capital
expenditures and earnings before interest, taxes, depreciation
and amortization and default provisions, including provisions
related to non-payment of principal and interest, bankruptcy and
default under other debt agreements. There was no balance
outstanding under the agreement at December 31, 2001 and
2000.

On June 30, 2000, the Companys bank
released a director of the Company from the personal guaranty of
the revolving credit line.

Note 8  Comprehensive
Income (Loss)

The components of comprehensive income
(loss) are as follows:

|                            |                                         |                          |      |      |   |      |       |   |  |   |      |   | 
|--------------------------- | --------------------------------------- | ------------------------ | ---- | ---- | - | ---- | ----- | - |  | - | ---- | - | 
|                            |                                         |                         
|                            |                                         | Years Ended December 31,
|                            |                                         |                         
|                            |                                         | 2001                     |      | 2000 |   | 1999
|                            |                                         |                          |      |      |   |     
|Net income (loss)           |                                         | $                        | (351 | )    |   | $    | 1,872 |   |  | $ | (132 | )
|Other comprehensive loss:   |                                         |                          |      |      |   |      |       |   |  |   |      |  
|                            | Foreign currency translation adjustment |                          |      | (9   | ) |      |       |  |  |   |      |  | 
|                            |                                         |                          |      |      |   |      |       |   |  |   |      |  
|Comprehensive income (loss) |                                         | $                        | (360 | )    |   | $    | 1,872 |   |  | $ | (132 | )
|                            |                                         |                          |      |      |   |      |       |   |  |   |      |  

Note 9  Shareholders
Equity

Net Income
(Loss) Per Share

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

|                                |                                               |                          |      |        |   |      |       |        |  |   |      |       |  
|------------------------------- | --------------------------------------------- | ------------------------ | ---- | ------ | - | ---- | ----- | ------ |  | - | ---- | ----- | -
|                                |                                               |                         
|                                |                                               | Years Ended December 31,
|                                |                                               |                         
|                                |                                               | 2001                     |      | 2000   |   | 1999
|                                |                                               |                          |      |        |   |     
|Net income (loss)               |                                               | $                        | (351 | )      |   | $    | 1,872 |        |  | $ | (132 | )    
|Weighted average common shares: |                                               |                          |      |        |   |      |       |        |  |   |      |      
|                                | Basic                                         |                          |      | 12,723 |   |      |       | 11,049 |  |   |      | 8,688 |  
|                                | Effect of dilutive stock options and warrants |                          |      |       |   |      |       | 721    |  |   |      |      |  
|                                |                                               |                          |      |        |   |      |       |        |  |   |      |      
|                                | Diluted                                       |                          |      | 12,723 |   |      |       | 11,770 |  |   |      | 8,688 |  
|                                |                                               |                          |      |        |   |      |       |        |  |   |      |      
|Net income (loss) per share:    |                                               |                          |      |        |   |      |       |        |  |   |      |      
|                                | Basic                                         |                          | $    | (0.03  | ) |      | $     | 0.17   |  |   | $    | (0.02 | )
|                                | Diluted                                       |                          | $    | (0.03  | ) |      | $     | 0.16   |  |   | $    | (0.02 | )

The total weighted average number of stock
options and warrants excluded from the calculation of
potentially dilutive securities either due to the exercise price
exceeding the average market price or the inclusion of such
securities in a calculation of net loss per share would have
been anti-dilutive for the years ended December 31, 2001,
2000 and 1999 were 1,585, 129 and 852, respectively.

37



---



##### 



AUGUST TECHNOLOGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Common
Stock

On June 14, 2000, the Company sold 3,300
shares of Common Stock in the Companys initial public
offering for cash of $39,600. The Company incurred expenses of
$3,740 that were netted with the cash proceeds received.

During 1999, the Company sold 825 shares of
Common Stock for cash of $1,993 to private investors. The
Company incurred expenses of $6 that were netted with the cash
proceeds received.

Deferred
Compensation

In connection with the grant of stock options to
employees in 1999, the Company recorded deferred compensation of
$428, representing the difference between the estimated deemed
value of the Common Stock for accounting purposes and the
exercise price of such options at the date of grant. Such amount
is presented as a reduction of shareholders equity and
will be amortized ratably over the vesting period of the options
granted, generally five years. The charge to compensation
expense related to this deferred compensation for the years
ended December 31, 2001 and 2000 was $93 and $98,
respectively.

Employee
Stock Purchase Plan

During 2000, the Board of Directors and
stockholders adopted the 2000 Employee Stock Purchase Plan (the
2000 Purchase Plan). The 2000 Purchase Plan allows
employees, subject to certain restrictions, to purchase the
Companys Common Stock through payroll deductions.
Contributions are limited to 10% of an employees
compensation. The purchase price is set at 85% of the lower of
the closing market price of the Companys Common Stock at
the commencement or termination of a participation phase.
Participation phases have a duration of six months and begin on
January 1 and July 1 of each year. The Board of
Directors has reserved 375 shares of Common Stock for issuance
under the 2000 Purchase Plan. As of December 31, 2001, 47
shares of Common Stock had been purchased and 328 shares remain
reserved for future issuance under the 2000 Purchase Plan.

Stock-based
Compensation

The Board of Directors and stockholders have
adopted the 1997 incentive stock option plan (the 1997
Option Plan), which originally provided for 1,125 shares
available for issuance primarily to officers, directors and key
employees. On April 14, 2000 and April 19, 2001, the
shareholders authorized increases in the number of shares
available for issuance to 2,250 and 2,650 shares, respectively.
The 1997 Option Plan permits the granting of incentive stock
options meeting the requirements of Section 422 of the
Internal Revenue Code of 1986, as amended, and also nonqualified
stock options which do not meet the requirements of
Section 422. The exercise price of incentive stock options
may not be less than the fair market value of the stock at the
date of grant. The exercise price of nonqualified stock options
may not be less than 85% of the fair market value of the stock
at the date of grant. The stock options vest over periods that
range from immediate to five years and expire seven years from
the date of grant. As of December 31, 2001, there were
2,348 shares reserved for future issuance under the 1997 Option
Plan.

38



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##### 



AUGUST TECHNOLOGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Information with respect to option activity is as
follows:

|                                 |           |            |       |                |   |   |      |       | 
|-------------------------------- | --------- | ---------- | ----- | -------------- | - | - | ---- | ----- | 
|                                 |           |            |       | Weighted      
|                                 |           | Shares     |       | Average       
|                                 |           | Subject to |       | Exercise Price
|                                 |           | Options    |       | Per Share     
|                                 |           |            |       |               
|Outstanding at December 31, 1998 |           |            | 714   |                |   | $ | 0.94 |      
|                                 | Granted   |            |       | 467            |   |   |      | 2.17  | 
|                                 | Exercised |            |       |               |   |   |      | 1.20  | 
|                                 | Forfeited |            |       | (37            | ) |   |      | 1.25  | 
|                                 |           |            |       |                |   |   |      |      
|Outstanding at December 31, 1999 |           |            | 1,144 |                |   |   | 1.44 |      
|                                 | Granted   |            |       | 679            |   |   |      | 11.62 | 
|                                 | Exercised |            |       | (151           | ) |   |      | 0.96  | 
|                                 | Forfeited |            |       | (167           | ) |   |      | 5.89  | 
|                                 |           |            |       |                |   |   |      |      
|Outstanding at December 31, 2000 |           |            | 1,505 |                |   |   | 5.64 |      
|                                 | Granted   |            |       | 385            |   |   |      | 11.55 | 
|                                 | Exercised |            |       | (151           | ) |   |      | 2.03  | 
|                                 | Forfeited |            |       | (123           | ) |   |      | 9.90  | 
|                                 |           |            |       |                |   |   |      |      
|Outstanding at December 31, 2001 |           |            | 1,616 |                |   | $ | 7.06 |      
|                                 |           |            |       |                |   |   |      |      

The following table summarizes information about
stock options outstanding at December 31, 2001:

|                |                |             |  |              |       |          |  |             |     |                |  |   |       |  |  |  |     |  |  |   |       | 
|--------------- | -------------- | ----------- |  | ------------ | ----- | -------- |  | ----------- | --- | -------------- |  | - | ----- |  |  |  | --- |  |  | - | ----- | 
|                |                |             |  | Weighted     |       |          |  |            
|                |                |             |  | Average      |       |          |  | Exercisable
|                |                |             |  | Remaining    |       | Weighted |  |            
|                |                |             |  | Contractual  |       | Average  |  |             |     | Weighted      
|Range of        |                | Outstanding |  | Life (years) |       | Exercise |  | Exercisable |     | Average       
|Exercise Prices |                | Options     |  | Weighted     |       | Price    |  | Options     |     | Exercise Price
|                |                |             |  |              |       |          |  |             |     |               
|                | $ 0.50   0.55 |             |  |              | 155   |          |  |             | 2.6 |                |  | $ | 0.50  |  |  |  | 155 |  |  | $ | 0.50  | 
|                | 0.56   1.20   |             |  |              | 334   |          |  |             | 3.8 |                |  |   | 1.20  |  |  |  | 207 |  |  |   | 1.20  | 
|                | 1.21   2.37   |             |  |              | 234   |          |  |             | 4.9 |                |  |   | 2.37  |  |  |  | 81  |  |  |   | 2.37  | 
|                | 2.38   9.92   |             |  |              | 198   |          |  |             | 5.8 |                |  |   | 8.62  |  |  |  | 51  |  |  |   | 9.11  | 
|                | 9.93  11.25   |             |  |              | 163   |          |  |             | 6.3 |                |  |   | 10.47 |  |  |  | 15  |  |  |   | 10.87 | 
|                | 11.26  12.38  |             |  |              | 187   |          |  |             | 5.5 |                |  |   | 12.06 |  |  |  | 40  |  |  |   | 12.07 | 
|                | 12.39  13.25  |             |  |              | 172   |          |  |             | 6.2 |                |  |   | 13.11 |  |  |  | 74  |  |  |   | 12.95 | 
|                | 13.26  16.94  |             |  |              | 173   |          |  |             | 5.9 |                |  |   | 14.22 |  |  |  | 47  |  |  |   | 13.99 | 
|                |                |             |  |              |       |          |  |             |     |                |  |   |       |  |  |  |     |  |  |   |       | 
|                | $ 0.50  16.94 |             |  |              | 1,616 |          |  |             | 5.0 |                |  | $ | 7.06  |  |  |  | 670 |  |  | $ | 4.84  | 
|                |                |             |  |              |       |          |  |             |     |                |  |   |       |  |  |  |     |  |  |   |       | 

The estimated per share weighted average fair
value of all stock options granted during the years ended
December 31, 2001, 2000 and 1999 was $7.48, $7.25 and
$0.86, respectively. The fair value of each option

39



---



##### 



AUGUST TECHNOLOGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

grant was estimated using the Black-Scholes
option pricing model with the following weighted average
assumptions:

|                        |  |                          |           |      |  |      |           |  |  |  |         | 
|----------------------- |  | ------------------------ | --------- | ---- |  | ---- | --------- |  |  |  | ------- | 
|                        |  |                         
|                        |  | Years Ended December 31,
|                        |  |                         
|                        |  | 2001                     |           | 2000 |  | 1999
|                        |  |                          |           |      |  |     
|Expected life           |  |                          | 5.7 years |      |  |      | 5.5 years |  |  |  | 7 years | 
|Risk free interest rate |  |                          | 4.8%      |      |  |      | 6.1%      |  |  |  | 6.6%    | 
|Volatility              |  |                          | 69.9%     |      |  |      | 68.6%     |  |  |  |        | 
|Dividend yield          |  |                          |          |      |  |      |          |  |  |  |        | 

Had the Company recorded compensation cost based
on the estimated fair value on the date of grant, as defined by
SFAS 123, the Companys pro forma net income
(loss) would have been as follows:

|                                     |             |                          |   |        |   |      |   |       |  |  |   |       |  
|------------------------------------ | ----------- | ------------------------ | - | ------ | - | ---- | - | ----- |  |  | - | ----- | -
|                                     |             |                         
|                                     |             | Years Ended December 31,
|                                     |             |                         
|                                     |             | 2001                     |   | 2000   |   | 1999
|                                     |             |                          |   |        |   |     
|Net income (loss):                   |             |                          |   |        |   |      |   |       |  |  |   |      
|                                     | As reported |                          | $ | (351   | ) |      | $ | 1,872 |  |  | $ | (132  | )
|                                     | Pro forma   |                          |   | (1,267 | ) |      |   | 1,309 |  |  |   | (197  | )
|Basic net income (loss) per share:   |             |                          |   |        |   |      |   |       |  |  |   |      
|                                     | As reported |                          | $ | (0.03  | ) |      | $ | 0.17  |  |  | $ | (0.02 | )
|                                     | Pro forma   |                          |   | (0.10  | ) |      |   | 0.12  |  |  |   | (0.02 | )
|Diluted net income (loss) per share: |             |                          |   |        |   |      |   |       |  |  |   |      
|                                     | As reported |                          | $ | (0.03  | ) |      | $ | 0.16  |  |  | $ | (0.02 | )
|                                     | Pro forma   |                          |   | (0.10  | ) |      |   | 0.11  |  |  |   | (0.02 | )

Note 10  Leases

The Company leases its office and manufacturing
facilities and certain equipment under noncancelable operating
leases. Future minimum lease payments as of December 31, 2001,
excluding operating costs, under these leases are as follows:

|                                  |                              |        |     |       | 
|--------------------------------- | ---------------------------- | ------ | --- | ----- | 
|For the Years Ending December 31, |                              | Amount
|                                  |                              |       
|2002                              |                              | $      | 699 |      
|2003                              |                              |        | 665 |      
|2004                              |                              |        | 677 |      
|2005                              |                              |        | 693 |      
|2006                              |                              |        | 231 |      
|Thereafter                        |                              |        |    |      
|                                  |                              |        |     |      
|                                  | Total minimum lease payments |        | $   | 2,965 | 
|                                  |                              |        |     |      

Rent expense for all operating leases for the
years ended December 31, 2001, 2000 and 1999 was $617, $485
and $89, respectively.

In connection with the Companys commitment
in October 1999 to relocate to a new facility in February 2000,
the Company recorded a lease obligation in 1999 of $129 related
to the estimated net remaining lease obligation on the facility
being vacated. In August 2000, the Company subleased the vacated
facility and, as a result, recorded an additional lease
obligation of $106 due to the net remaining lease obligation
being greater than originally estimated.

40



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##### 



AUGUST TECHNOLOGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note 11  Employee Retirement
Plan

The Company maintains an employee benefit plan
(the Plan) pursuant to Section 401(k) of the
Internal Revenue Code. The Plan is available to all employees
who have reached the age of 18 and provides employees with tax
deferred salary deductions and alternative investment options.
Employees may contribute up to 15% of their eligible
compensation, subject to certain limitations. The Company
matches 50% of the deferrals up to 6% of the employees
compensation. The Company made contributions to the Plan for the
years ended December 31, 2001, 2000 and 1999 of $250, $88
and $42, respectively.

Note 12  Significant Customer
Information

The percentage of net revenues derived from major
customers, which include distributors, and accounts receivable
related to these customers were as follows:

|              |            |              |  |      |    |      |  |    |    |   |  |    |    |  
|------------- | ---------- | ------------ |  | ---- | -- | ---- |  | -- | -- | - |  | -- | -- | -
|              |            |             
|              |            | Years Ended 
|              |            | December 31,
|              |            |             
|              |            | 2001         |  | 2000 |    | 1999
|              |            |              |  |      |    |     
|Net revenues: |            |              |  |      |    |      |  |    |    |   |  |   
|              | Customer A |              |  | 17   | %  |      |  | 3  | %  |   |  | 0  | % 
|              | Customer B |              |  | 13   | %  |      |  | 16 | %  |   |  | 7  | % 
|              | Customer C |              |  | 13   | %  |      |  | 8  | %  |   |  | 4  | % 
|              | Customer D |              |  | 12   | %  |      |  | 3  | %  |   |  | 1  | % 
|              | Customer E |              |  | 2    | %  |      |  | 9  | %  |   |  | 11 | % 
|              | Customer F |              |  | 1    | %  |      |  | 3  | %  |   |  | 11 | % 
|              |            |              |  |      |    |      |  |    |    |   |  |   
|              |            | Total        |  |      | 58 | %    |  |    | 42 | % |  |    | 34 | %
|              |            |              |  |      |    |      |  |    |    |   |  |   

|                     |            |              |  |      |    |   |  |    |    |   |  |  |  | 
|-------------------- | ---------- | ------------ |  | ---- | -- | - |  | -- | -- | - |  |  |  | 
|                     |            |              |  |     
|                     |            | December 31, |  |     
|                     |            |              |  |     
|                     |            | 2001         |  | 2000 |    |  
|                     |            |              |  |      |    |  
|Accounts receivable: |            |              |  |      |    |   |  |    |    |   |  | 
|                     | Customer A |              |  |     |    |   |  |   |    |   |  |  | 
|                     | Customer B |              |  | 22   | %  |   |  | 29 | %  |   |  |  | 
|                     | Customer C |              |  | 1    | %  |   |  | 6  | %  |   |  |  | 
|                     | Customer D |              |  | 35   | %  |   |  | 3  | %  |   |  |  | 
|                     | Customer E |              |  | 8    | %  |   |  | 8  | %  |   |  |  | 
|                     | Customer F |              |  |     |    |   |  | 7  | %  |   |  |  | 
|                     |            |              |  |      |    |   |  |    |    |   |  | 
|                     |            | Total        |  |      | 66 | % |  |    | 53 | % |  |  |  | 
|                     |            |              |  |      |    |   |  |    |    |   |  | 

41



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##### 



AUGUST TECHNOLOGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note 13  Geographic
Information

All of the Companys tangible long-lived
assets are located in the United States, except for a small
amount of property and equipment in Taiwan. The Company derives
revenues from shipments to customers outside of the United
States. The percentage of net revenues by country were as
follows:

|              |               |              |     |      |   |      |     |    |   |  |     |    |  
|------------- | ------------- | ------------ | --- | ---- | - | ---- | --- | -- | - |  | --- | -- | -
|              |               |             
|              |               | Years Ended 
|              |               | December 31,
|              |               |             
|              |               | 2001         |     | 2000 |   | 1999
|              |               |              |     |      |   |     
|Net revenues: |               |              |     |      |   |      |     |    |   |  |     |   
|              | United States |              |     | 56   | % |      |     | 55 | % |  |     | 57 | %
|              | Taiwan        |              |     | 18   | % |      |     | 22 | % |  |     | 10 | %
|              | Japan         |              |     | 13   | % |      |     | 8  | % |  |     | 5  | %
|              | Switzerland   |              |     | 2    | % |      |     | 9  | % |  |     | 11 | %
|              | Other         |              |     | 11   | % |      |     | 6  | % |  |     | 17 | %
|              |               |              |     |      |   |      |     |    |   |  |     |   
|              |               |              | 100 | %    |   |      | 100 | %  |   |  | 100 | % 
|              |               |              |     |      |   |      |     |    |   |  |     |   

Note 14  Quarterly Financial Data
(unaudited)

|                                |         |                                       |        |          |  |           |        |          |  |   |        |        |   |   |        |        |  
|------------------------------- | ------- | ------------------------------------- | ------ | -------- |  | --------- | ------ | -------- |  | - | ------ | ------ | - | - | ------ | ------ | -
|                                |         |                                      
|                                |         | Three Months Ended                   
|                                |         |                                      
|                                |         | Mar. 31,                              |        | June 30, |  | Sept. 30, |        | Dec. 31,
|                                |         | 2001                                  |        | 2001     |  | 2001      |        | 2001    
|                                |         |                                       |        |          |  |           |        |         
|                                |         |                                      
|                                |         | (In thousands, except per share data)
|Net revenues                    |         | $                                     | 10,904 |          |  | $         | 10,155 |          |  | $ | 3,253  |        |   | $ | 5,472  |       
|Gross profit                    |         |                                       | 6,633  |          |  |           | 6,232  |          |  |   | 1,759  |        |   |   | 3,121  |       
|Operating income (loss)         |         |                                       | 1,292  |          |  |           | 553    |          |  |   | (2,741 | )      |   |   | (1,678 | )     
|Net income (loss)               |         |                                       | 1,149  |          |  |           | 617    |          |  |   | (1,378 | )      |   |   | (739   | )     
|Net income (loss) per share:    |         |                                       |        |          |  |           |        |          |  |   |        |        |   |   |        |       
|                                | Basic   |                                       | $      | 0.09     |  |           | $      | 0.05     |  |   | $      | (0.11  | ) |   | $      | (0.06  | )
|                                | Diluted |                                       | $      | 0.09     |  |           | $      | 0.05     |  |   | $      | (0.11  | ) |   | $      | (0.06  | )
|Weighted average common shares: |         |                                       |        |          |  |           |        |          |  |   |        |        |   |   |        |       
|                                | Basic   |                                       |        | 12,640   |  |           |        | 12,687   |  |   |        | 12,768 |   |   |        | 12,795 |  
|                                | Diluted |                                       |        | 13,290   |  |           |        | 13,301   |  |   |        | 12,768 |   |   |        | 12,795 |  

|                                |         |                                       |       |          |   |           |       |          |  |   |       |        |  |   |        |        | 
|------------------------------- | ------- | ------------------------------------- | ----- | -------- | - | --------- | ----- | -------- |  | - | ----- | ------ |  | - | ------ | ------ | 
|                                |         |                                      
|                                |         | Three Months Ended                   
|                                |         |                                      
|                                |         | Mar. 31,                              |       | June 30, |   | Sept. 30, |       | Dec. 31,
|                                |         | 2000                                  |       | 2000     |   | 2000      |       | 2000    
|                                |         |                                       |       |          |   |           |       |         
|                                |         |                                      
|                                |         | (In thousands, except per share data)
|Net revenues                    |         | $                                     | 4,503 |          |   | $         | 7,696 |          |  | $ | 8,990 |        |  | $ | 10,477 |       
|Gross profit                    |         |                                       | 2,619 |          |   |           | 4,602 |          |  |   | 5,471 |        |  |   | 6,380  |       
|Operating income (loss)         |         |                                       | (410  | )        |   |           | 526   |          |  |   | 750   |        |  |   | 835    |       
|Net income (loss)               |         |                                       | (451  | )        |   |           | 505   |          |  |   | 881   |        |  |   | 937    |       
|Net income (loss) per share:    |         |                                       |       |          |   |           |       |          |  |   |       |        |  |   |        |       
|                                | Basic   |                                       | $     | (0.05    | ) |           | $     | 0.05     |  |   | $     | 0.07   |  |   | $      | 0.07   | 
|                                | Diluted |                                       | $     | (0.05    | ) |           | $     | 0.05     |  |   | $     | 0.07   |  |   | $      | 0.07   | 
|Weighted average common shares: |         |                                       |       |          |   |           |       |          |  |   |       |        |  |   |        |       
|                                | Basic   |                                       |       | 9,165    |   |           |       | 9,837    |  |   |       | 12,591 |  |   |        | 12,605 | 
|                                | Diluted |                                       |       | 9,165    |   |           |       | 10,604   |  |   |       | 13,321 |  |   |        | 13,292 | 

42



---



##### 





|        |                                                                                      
|------- | -------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements With Accountants
	on Accounting and Financial Disclosure

None

Part III



|         |                                                    
|-------- | ---------------------------------------------------
|Item 10. | Directors and Executive Officers of the
	Registrant

The Company will furnish to the Securities and
Exchange Commission a definitive Proxy Statement (the
Proxy Statement) not later than 120 days after
the close of the year ended December 31, 2001. Other than
Executive Officers of the Registrant, which is set
forth at the end of Part I of this Form 10-K, the
information required by this item is incorporated herein by
reference to the sections labeled Election of
Directors and Compliance With Section 16(a) of
the Exchange Act, which appear in the Proxy Statement.



|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

The information required by this item is
incorporated herein by reference to the sections labeled
Executive Compensation and Election of
Directors in the Proxy Statement.



|         |                                                                
|-------- | ---------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
	Owners and Management

The information required by this item is
incorporated herein by reference to the section labeled
Principal Shareholders and Management Shareholdings
in the Proxy Statement.



|         |                                                
|-------- | -----------------------------------------------
|Item 13. | Certain Relationships and Related
	Transactions

None

PART IV

Item 14.     Exhibits,
Financial Statements, Schedules and Reports on
Form 8-K

(a) Documents filed as part of this
report.



| |     |                                                                                                                              
| | --- | -----------------------------------------------------------------------------------------------------------------------------
| | (1) | Financial Statements.The following financial statements are
	included in Part II, Item 8 of this Annual Report on
	Form 10-K:

Independent Auditors Report

Consolidated Balance Sheets as of
December 31, 2001 and 2000

Consolidated Statements of Operations for the
Years Ended December 31, 2001, 2000 and 1999

Consolidated Statements of Shareholders
Equity for the Years Ended December 31, 2001, 2000 and 1999

Consolidated Statements of Cash Flows for the
Years Ended December 31, 2001, 2000 and 1999

Notes to Consolidated Financial Statements



| |     |                                                                                                                              
| | --- | -----------------------------------------------------------------------------------------------------------------------------
| | (2) | Financial Statement Schedules.The following schedule is included
	immediately following the signature page of this Form 10-K:

Independent Auditors Report on Financial
Statement Schedule

Schedule II  Valuation and
Qualifying Accounts.

43



---



##### 





| |                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | All other schedules are omitted since they are
	not applicable, not required or the information is presented in
	the consolidated financial statements or related notes.



| |     |          
| | --- | ---------
| | (3) | Exhibits.



| |                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------
| | The exhibits included in this report are set
	forth on the Exhibit Index to Form 10-K
	following the signature page of this Form 10-K.

(b) Reports on Form 8-K.



| |                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | No reports on Form 8-K were filed by the
	Company during the quarter ended December 31, 2001;
	however, a Report on Form 8-K dated November 30, 2001
	was filed by the Company on January 10, 2002 pursuant to
	Item 5 (Other Events) to report the adoption of a trading
	plan in compliance with Rule 10b5-1 of the Securities
	Exchange Act of 1934 by Thomas C. Verburgt, the Companys
	Chief Technology Officer.

44



---



##### 



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.



| |                              
| | -----------------------------
| | AUGUST TECHNOLOGY CORPORATION



| |     |                   
| | --- | ------------------
| | By: | /s/ JEFF L. ODELL

| |                              
| | -----------------------------
| |                              
| | Jeff L. ODell               
| | Chief Executive Officer      
| | (Principal Executive Officer)

Date: March 8, 2002

In accordance with the Exchange Act, this report
has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated
below.

Each person whose signature appears below
constitutes and appoints Jeff L. ODell and Thomas C. Velin
as the undersigneds true and lawful attorneys-in fact and
agents, each acting alone, with full power of substitution and
resubstitution, for the undersigned and in the
undersigneds name, place and stead, in any and all
amendments to this Annual Report on Form 10-K and to file
the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange
Commission, granted unto said attorneys-in-fact and
agents, each acting alone, full power and authority to do and
perform each and every act and thing requisite and necessary to
be done in and about the premises, as fully to all intents and
purposes as the undersigned might or could do in person, hereby
ratifying and confirming all said attorneys-in-fact and agents,
each acting alone, or his substitute or substitutes, may
lawfully do or cause to be done by virtue thereof.

|                       |  |                                                                                          |  |              
|---------------------- |  | ---------------------------------------------------------------------------------------- |  | -------------
|Signature              |  | Title                                                                                    |  | Date         
|                       |  |                                                                                          |  |              
|                      
|/s/ JEFF L. ODELL     |  | Chairman of the Board and
	Chief Executive Officer
	(Principal Executive Officer)        |  | March 8, 2002
|                      
|/s/ THOMAS C. VELIN    |  | Chief Financial Officer
	(Principal Financial Officer and
	Principal Accounting Officer) |  | March 8, 2002
|                      
|/s/ THOMAS C. VERBURGT |  | Chief Technology Officer and Director                                                    |  | March 8, 2002
|                       |  |                                                                                          |  |              
|                      
|/s/ MARK R. HARLESS    |  | Chief Engineer and Director                                                              |  | March 8, 2002
|                       |  |                                                                                          |  |              
|                      
|/s/ JAMES A. BERNARDS  |  | Director                                                                                 |  | March 8, 2002
|                       |  |                                                                                          |  |              
|                      
|/s/ ROGER E. GOWER     |  | Director                                                                                 |  | March 8, 2002
|                       |  |                                                                                          |  |              
|                      
|/s/ BRAD D. SLYE       |  | Director                                                                                 |  | March 8, 2002
|                       |  |                                                                                          |  |              
|                      
|/s/ MICHAEL W. WRIGHT  |  | Director                                                                                 |  | March 8, 2002
|                       |  |                                                                                          |  |              

45



---



##### 



INDEPENDENT AUDITORS REPORT

ON FINANCIAL STATEMENT SCHEDULE


The Board of Directors and Shareholders

August Technology Corporation:


Under date of February 11, 2002, we reported
on the consolidated balance sheets of August Technology
Corporation and subsidiary as of December 31, 2001 and
2000, and the related consolidated statements of operations,
shareholders equity and cash flows for each of the years
in the three-year period ended December 31, 2001, as
included in August Technology Corporations Annual Report
on Form 10-K for the year ended December 31, 2001. In
connection with our audits of the aforementioned consolidated
financial statements, we also audited the related financial
statement schedule as listed in the accompanying index (see
Item 14(a)(2)). This financial statement schedule is the
responsibility of August Technology Corporations
management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits.

In our opinion, such financial statement
schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.



| |             
| | ------------
| | /s/ KPMG LLP

Minneapolis, Minnesota

February 11, 2002


46



---



##### 



SCHEDULE II VALUATION AND QUALIFYING
ACCOUNTS

VALUATION AND QUALIFYING ACCOUNTS

FOR THE THREE YEARS ENDED DECEMBER 31, 2001,
2000 AND 1999


(In thousands)


|                                |  |                              |  |            |   |            |  |          |   |            |  |           |   |   |  |  |   |     |      |  |   |     |  | 
|------------------------------- |  | ---------------------------- |  | ---------- | - | ---------- |  | -------- | - | ---------- |  | --------- | - | - |  |  | - | --- | ---- |  | - | --- |  | 
|                                |  |                              |  | Balance at |   | Charged to |  | Charged  |   |            |  | Balance  
|                                |  |                              |  | Beginning  |   | Costs and  |  | to Other |   |            |  | at End   
|Description                     |  | Date                         |  | of Period  |   | Expenses   |  | Accounts |   | Deductions |  | of Period
|                                |  |                              |  |            |   |            |  |          |   |            |  |          
|Allowance for doubtful accounts |  | Year ended December 31, 1999 |  |            | $ | 15         |  |          | $ | 31         |  |           | $ |  |  |  | $ | (1  | )(a) |  | $ | 45  | 
|                                |  | Year ended December 31, 2000 |  |            |   | 45         |  |          |   | 220        |  |           |   |  |  |  |   | (10 | )(a) |  |   | 255 | 
|                                |  | Year ended December 31, 2001 |  |            |   | 255        |  |          |   | 157        |  |           |   |  |  |  |   | (10 | )(a) |  |   | 402 | 



---



|    |                                                                    
|--- | -------------------------------------------------------------------
|(a) | Represents write-offs of uncollectible accounts
        receivable.

47



---



##### 



SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


EXHIBIT INDEX TO FORM 10-K



|                           |                               
|-------------------------- | ------------------------------
|For the fiscal year ended: | Commission File No.: 000-30637

December 31, 2001




---

AUGUST TECHNOLOGY CORPORATION



---

|        |       |             |  |                                                                                                                                                                                                                                                                                                                                                                     
|------- | ----- | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |            
|Number  |       | Description
|        |       |            
|        | 3.1   |             |  | Amended and Restated Articles of Incorporation of
	the Company (incorporated by reference to Exhibit 3.1 to
	the Companys Registration Statement on Form S-1, Reg.
	No. 333-32692)                                                                                                                                                                                 
|        | 3.2   |             |  | Amended and Restated Bylaws of the Company
	(incorporated by reference to Exhibit 3.2 to the
	Companys Registration Statement on Form S-1, Reg.
	No. 333-32692)                                                                                                                                                                                                    
|        | 4.1   |             |  | Instruments defining the rights of security
	holders, including indentures (reference is made to
	Exhibits 3.1 and 3.2)                                                                                                                                                                                                                                             
|        | 4.2   |             |  | Form of Stock Certificate (incorporated by
	reference to Exhibit 4.2 to the Companys Registration
	Statement on Form S-1, Reg. No. 333-32692)                                                                                                                                                                                                                      
|        | 10.1  |             |  | 1997 Stock Option Plan, as amended and restated
	through April 20, 2001 (incorporated by reference to
	Exhibit 10.1 to the Companys Form 10-Q for the
	quarter ended June 30, 2001)**                                                                                                                                                                              
|        | 10.2  |             |  | International Distributor Agreement between the
	Company and Marubeni Solutions Corporation dated June 14,
	1999 (incorporated by reference to Exhibit 10.2 to the
	Companys Registration Statement on Form S-1, Reg.
	No. 333-32692)                                                                                                                              
|        | 10.3  |             |  | International Distributor Agreement between the
	Company and Metron Technology B.V. dated September 10, 1999
	(incorporated by reference to Exhibit 10.3 to the
	Companys Registration Statement on Form S-1, Reg.
	No. 333-32692)                                                                                                                                 
|        | 10.4  |             |  | International Distributor Agreement between the
	Company and Quasys AG dated September 23, 1996
	(incorporated by reference to Exhibit 10.4 to the
	Companys Registration Statement on Form S-1, Reg.
	No. 333-32692)                                                                                                                                              
|        | 10.5  |             |  | International Distributor Agreement between the
	Company and Firfax Systems Ltd. dated September 3, 1996
	(incorporated by reference to Exhibit 10.5 to the
	Companys Registration Statement on Form S-1, Reg.
	No. 333-32692)                                                                                                                                     
|        | 10.6  |             |  | Office Warehouse Lease Agreement between the
	Company and West 78th Street, Bloomington Associates, LLC, dated
	October 18, 1999 (incorporated by reference to
	Exhibit 10.9 to the Companys Registration Statement
	on Form S-1, Reg. No. 333-32692)                                                                                                              
|        | 10.7  |             |  | Letter Agreement between the Company and
	Marquette Capital Bank, N.A., dated November 4, 1999, as
	amended by Amendment to Letter Agreement dated March 10,
	2000, as further amended by Amendment to Letter Agreement dated
	March 16, 2000 (incorporated by reference to
	Exhibit 10.10 to the Companys Registration Statement
	on Form S-1, Reg. No. 333-32692)
|        | 10.8  |             |  | Promissory Note between the Company and Marquette
	Capital Bank, N.A., dated November 4, 1999 (incorporated by
	reference to Exhibit 10.11 to the Companys
	Registration Statement on Form S-1, Reg. No. 333-32692)                                                                                                                                                
|        | 10.9  |             |  | Lease Agreement between the Company and Duke
	Realty Minnesota, LLC, dated August 18, 1998 (incorporated
	by reference to Exhibit 10.12 to the Companys
	Registration Statement on Form S-1, Reg. No. 333-32692)                                                                                                                                                   
|        | 10.10 |             |  | Stock Purchase Warrant between the Company and
	III-D Capital, LLC, dated July 24, 1998 (incorporated by
	reference to Exhibit 10.13 to the Companys
	Registration Statement on Form S-1, Reg. No. 333-32692)                                                                                                                                                      
|        | 10.11 |             |  | August Technology 2000 Annual Award Plan
	(incorporated by reference to Exhibit 10.14 to the
	Companys Registration Statement on Form S-1, Reg.
	No. 333-32692)**                                                                                                                                                                                                  

48



---



##### 



|        |       |             |  |                                                                                                                                                                                                                                                                 
|------- | ----- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |            
|Number  |       | Description
|        |       |            
|        | 10.12 |             |  | OEM Agreement between the Company and Santok
	Software Solutions Inc., dated January 26, 2000
	(incorporated by reference to Exhibit 10.15 to the
	Companys Registration Statement on Form S-1, Reg.
	No. 333-32692)                                           
|        | 10.13 | *           |  | 1998 Board of Directors Compensation Plan,
	adopted by the Board of Directors, amended and restated as of
	January 1, 2002**                                                                                                                                    
|        | 10.14 |             |  | August Technology 2000 Employee Stock Purchase
	Plan (incorporated by reference to Exhibit 10.17 to the
	Companys Registration Statement on Form S-1, Reg.
	No. 333-32692)**                                                                                   
|        | 10.15 |             |  | Guaranty for the benefit of Marquette Capital
	Bank, N.A., dated November 4, 1999 (incorporated by
	reference to Exhibit 10.18 to the Companys
	Registration Statement on Form S-1, Reg. No. 333-32692)                                                        
|        | 10.16 |             |  | Executive Employment Agreement between the
	Company and John M. Vasuta, dated May 8, 2000
	(incorporated by reference to Exhibit 10.19 to the
	Companys Form 10-K for the year ended
	December 31, 2000)**                                                     
|        | 10.17 |             |  | Executive Employment Agreement between the
	Company and James K. Nurse, dated August 22, 2000
	(incorporated by reference to Exhibit 10.20 to the
	Companys Form 10-K for the year ended
	December 31, 2000)**                                                 
|        | 10.18 |             |  | Executive Employment Agreement between the
	Company and Albert A. Eliasen, dated October 27, 2000
	(incorporated by reference to Exhibit 10.21 to the
	Companys Form 10-K for the year ended
	December 31, 2000)**                                             
|        | 10.19 |             |  | Amendments to the Lease Agreement between the
	Company and West 78th Street, Bloomington Associates, LLC, dated
	March 31, 2000 and July 25, 2000 (incorporated by
	reference to Exhibit 10.22 to the Companys
	Form 10-K for the year ended December 31, 2000)
|        | 10.20 |             |  | Amendment to Letter Agreement and Promissory Note
	between the Company and Marquette Capital Bank, N.A., dated
	August 10, 2000 (incorporated by reference to
	Exhibit 10.23 to the Companys Form 10-K for the
	year ended December 31, 2000)                  
|        | 10.21 |             |  | August Technology 2001 Annual Incentive Plan
	(incorporated by reference to Exhibit 10.24 to the
	Companys Form 10-K for the year ended
	December 31, 2000)**                                                                                                  
|        | 10.22 | *           |  | Executive Employment Contract between the Company
	and Jeff L. ODell, dated March 6, 2002**                                                                                                                                                                    
|        | 10.23 | *           |  | Executive Employment Contract between the Company
	and Thomas C. Velin, dated March 6, 2002**                                                                                                                                                                   
|        | 10.24 | *           |  | Executive Employment Contract between the Company
	and David Klenk, dated March 6, 2002**                                                                                                                                                                       
|        | 10.25 | *           |  | Executive Employment Contract between the Company
	and Mark Harless, dated March 6, 2002**                                                                                                                                                                      
|        | 10.26 | *           |  | Executive Employment Contract between the Company
	and Thomas Verburgt, dated March 6, 2002**                                                                                                                                                                   
|        | 10.27 | *           |  | Executive Employment Contract between the Company
	and John M. Vasuta, dated March 6, 2002**                                                                                                                                                                    
|        | 10.28 | *           |  | Executive Employment Contract between the Company
	and D. Mayson Brooks, dated March 5, 2002**                                                                                                                                                                  
|        | 10.29 | *           |  | Executive Employment Contract between the Company
	and Wayne Hubin, dated March 6, 2002**                                                                                                                                                                       
|        | 10.30 | *           |  | Executive Employment Contract between the Company
	and Albert Eliasen, dated March 6, 2002**                                                                                                                                                                    
|        | 10.31 | *           |  | August Technology 2002 Annual Incentive Plan**                                                                                                                                                                                                                  
|        | 10.32 | *           |  | Amendment to the Lease Agreement between the
	Company and West 78th Street, Bloomington Associates, LLC, dated
	June 18, 2001                                                                                                                                   
|        | 10.33 | *           |  | Amendment to the International Distributor
	Agreement between the Company and Metron Technology B.V., dated
	April 17, 2001                                                                                                                                     

49



---



##### 



|        |       |             |  |                                                                                                                                          
|------- | ----- | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |            
|Number  |       | Description
|        |       |            
|        | 21.1  |             |  | Subsidiaries of the Company (incorporated by
	reference to Exhibit 21.1 to the Companys
	Form 10-K for the year ended December 31, 2000)
|        | 23.1* |             |  | Independent Auditors Consent                                                                                                            



---



| |   |               
| | - | --------------
| | * | Filed herewith



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

50



---



##### 



CORPORATE INFORMATION




Corporate Headquarters




| |                              
| | -----------------------------
| | August Technology Corporation

4900 West 78th Street


Bloomington, Minnesota 55435 USA


Phone: (952) 820-0080


Fax: (952) 820-0060


Corporate Web Site

www.AugustTech.com

Investor Relations



| |             
| | ------------
| | Jennie Oberg

Phone: (952) 259-1676


Fax: (952) 820-0060


E-mail: invest@AugustTech.com


General Counsel



| |                         
| | ------------------------
| | Fredrikson & Bryon, P.A.

Minneapolis, Minnesota


Independent Auditors



| |         
| | --------
| | KPMG LLP

Minneapolis, Minnesota


Transfer Agent



| |                                 
| | --------------------------------
| | Wells Fargo Bank Minnesota, N.A.

Shareowner Services


161 North Concord Exchange Street


South St. Paul, Minnesota 55075


Phone: (800) 468-9716


Fax: (651) 450-4033


E-mail: StockTransfer@Wellsfargo.com


Market Information



| |                                     
| | ------------------------------------
| | The Companys Common Stock is traded

on The Nasdaq National Market and is


quoted under the symbol AUGT.


Officers


Jeff L. ODell

Chief Executive Officer


David L. Klenk

President and Chief Operating Officer


Thomas C. Velin

Chief Financial Officer


Board of Directors

Jeff L. ODell

| |                          
| | -------------------------
| | Chairman of the Board and

Chief Executive Officer


Mark R. Harless

Chief Engineer


Thomas C. Verburgt

Chief Technology Officer


James A. Bernards

| |                              
| | -----------------------------
| | President, Facilitation, Inc.

Chairman,
Compensation Committee


Audit Committee


Roger E. Gower

| |                                
| | -------------------------------
| | Chairman of the Board and Chief

Executive Officer, Micro Component


Technology, Inc.


Chairman, Audit
Committee


Compensation
Committee


Michael W. Wright

| |                                         
| | ----------------------------------------
| | President of the Microelectronics Group,

Entegris, Inc.


Audit Committee


August Technology, August Technology Logo, 3Di,
NSX, YieldPilot, Rapid Confocal Sensor, RCS and
clickService are trademarks of August Technology Corporation.

©, August Technology Corporation, 2002