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                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                ----------------

                                   FORM 10-KSB

[X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998

[ ]      TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
         ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO ____________

                           COMMISSION FILE NO. 0-27104

                        YIELDUP INTERNATIONAL CORPORATION
                 (NAME OF SMALL BUSINESS ISSUER IN OUR CHARTER)

                 DELAWARE                                      77-0341206
(STATE OR OTHER JURISDICTION OF INCORPORATION)           (I.R.S. EMPLOYER ID #)

              117 EASY STREET                                     94043
        MOUNTAIN VIEW, CALIFORNIA                               (ZIP CODE)
 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

                 Issuer's telephone number, including area code:

                                 (650) 964-0100

              Securities registered under Section 12(b) of the Act:

                                      NONE

              Securities registered under Section 12(g) of the Act:

                         COMMON STOCK, PAR VALUE $0.001
                         CLASS B WARRANTS, NO PAR VALUE
                                (TITLE OF CLASS)

         Check whether the issuer: 1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that we was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES [X] NO [ ]

         Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of our knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]

         Our revenues for the fiscal year ended December 31, 1998 were
$6,732,574.

         The aggregate market value of the voting stock held by non-affiliates
of YieldUP International Corporation, based upon the closing price of our common
stock on December 31, 1998 in the over-the-counter-market, was approximately
$12,124,000. Shares of voting stock held by each officer and director and by
each person who on that date owned 5% or more of the outstanding voting stock
have been excluded for purposes of the preceding computation, in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.

         As of December 31, 1998, we had 6,891,979 shares of common stock
outstanding and 1,364,497 shares of Class A common stock outstanding for a total
of 8,256,476 shares outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

         Parts of the Proxy Statement for our 1999 Annual Meeting of
Stockholders are incorporated by reference in Part III of this Form 10-KSB
Report.

         Transitional Small Business Disclosure Format YES [ ] NO [X]

         The exhibit index appears on page 38 of this Form 10-KSB Report.


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PART I

ITEM 1.  DESCRIPTION OF BUSINESS

MERGER

     On January 21, 1999, YieldUP International Corporation ("YieldUP") entered
into a definitive agreement with FSI International, Inc. ("FSI"), for FSI to
acquire all of its outstanding stock. The form of the transaction will be a
merger ("the Merger"). Under the terms of the definitive agreement, YieldUP
stockholders will receive $0.7313 in cash and 0.1567 of a share of FSI common
stock for each share of YieldUP common stock. YieldUP option holders will
receive substitute options entitling them to purchase FSI common stock. When the
Merger becomes effective, each outstanding warrant to purchase shares of our
common stock under any warrant agreement will become a right to acquire FSI
common stock. The warrants will be subject to substantially the same terms and
conditions as they were prior to the Merger. Each warrant, upon payment of the
exercise price, will entitle the holder to receive $.7313 cash and .1567 of a
share of FSI common stock for each share of YieldUP common stock the warrant
holder is entitled to. Completion of the transaction is subject to certain
closing conditions including, among other things, approval of the Merger by the
stockholders of YieldUP. FSI and YieldUP anticipate that the transaction will be
completed in late April or early May of 1999. As part of the agreement to be
acquired by FSI, we also granted FSI a non-exclusive royalty-bearing license to
our patent portfolio.

GENERAL

     We develop, manufacture, and market cleaning, rinsing, and drying equipment
used during several steps in the manufacturing process for semiconductors and
other defect sensitive substrates. Based on the results obtained by customers
using our products, we believe our technology allows more thorough and efficient
cleaning, rinsing and drying than conventional approaches, and that the products
based on our technology may enable manufacturers to obtain improvements in the
percentage of good product produced, or yield. Our cleaning, rinsing and drying
products also reduce the usage of certain environmentally hazardous materials,
and occupy less floor space when compared to conventional equipment. We
currently have approximately 120 cleaning, rinsing and drying systems installed
at about 80 customer sites in the semiconductor, semiconductor equipment,
magnetic disk, flat-panel display, and photo-mask industries.

     Disc-shaped wafers composed of silicon are the foundation on which
integrated circuits ("ICs") are manufactured in semiconductor fabrication
facilities. During the typical four to six week process of fabricating IC's on
these wafers, semiconductor manufacturers typically clean, rinse and dry the
wafers several times to prepare the wafer for the next IC fabrication step. For
example, before and after many steps such as etching and deposition of
materials, the manufacturer must thoroughly clean, rinse and dry the wafers to
remove any contaminants or moisture. The likelihood of completing these steps
successfully and producing good ICs depends significantly upon the cleanliness
of the wafers throughout all the process steps. Our products are designed to
reduce wafer particle contamination, stains, surface roughness, and other
defects that reduce IC yields, offering a cost-effective, integrated cleaning,
rinsing and drying system using patented filtration, rinsing and drying
technology with no mechanical motion and greatly reduced use of environmentally
hazardous materials.

     We are marketing our products for application at several points in the IC
fabrication process, and for use in the manufacturing processes of magnetic
disks, photo-masks and flat-panel displays. We believe that there are numerous
sites within typical high technology manufacturing facilities where
manufacturers could improve processes and reduce defects by replacing or
retrofitting existing equipment with our products.

     Our products include the CleanPoint de-ionized water filtration system, the
Omega 1000 Rinsing and Drying System designed to replace the conventional
Spin-Rinse Dryers ("SRD's"), the Omega 2000 Cleaning, Rinsing and Drying system
designed to handle large substrates including 12 inch (300mm) wafers and flat
panels, and the Omega 4000 Cleaning Rinsing and Drying system that provides
integrated hydrofluoric acid cleaning capability. We are also developing new
products and technology, which we expect to market in the latter half of 1999
and 2000.

     During the year ended December 31, 1998 our revenues, net of sales returns
of $512,000 and allowance for returns of $747,429 were $6,732,574, compared to
$7,465,447 for the year ended December 31, 1997. The decrease in revenue of 10%
in 1998 over 1997 was due to a decrease in the level of shipments and sales
returns and provision for returns for our cleaning, rinsing, and drying





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systems as a result of adverse industry conditions. We continue to modify and
improve our products, generally based on feedback from our customers, and have
increased our sales to OEM customers, and our export sales to Europe.

     Our cost of sales was $7,309,387 for the year ended December 31, 1998, and
$5,964,228 for the year ended December 31, 1997. Our gross deficit was $576,813
for the year ended December 31, 1998, compared to a gross margin of $1,501,219
or 20.1% for the year ended December 31, 1997. The gross deficit was due to
lower than expected revenues, sales returns and provision for sales returns of
$1,259,429, and a provision for excess inventory of $2,740,910. Our cost of
sales remained high during 1998 due to manufacturing expenses being allocated
over relatively few units. We expect that future gross margins should improve to
the extent unit shipments and revenue increase and we are able to continue our
transition to increased shipments of standardized products and lower unit
material costs.

PRODUCTS

     Through analyzing the fabrication process of leading semiconductor
manufacturers, we determined that the cleaning, rinsing and drying steps of the
manufacturing process present a significant, unfilled opportunity for yield
improvement. We have developed and are marketing equipment that incorporates our
patented cleaning, rinsing, and drying technologies which we believe may help
manufacturers achieve significant contamination reduction, and resulting yield
improvement. We currently market the following products:

CleanPoint Water Filtration System

     The CleanPoint Water Filtration System is a patented de-ionized water
filtration system designed to eliminate microscopic particle contamination in
de-ionized water at the point of use. The CleanPoint system is an integral part
of our cleaning, rinsing, and drying systems and is also marketed independently
for other filtration applications.

Omega 1000

     The Omega 1000 system is a low cost, stand-alone rinsing and drying system
with a small footprint designed to replace conventional SRD technology in
semiconductor manufacturing facilities. It has an advanced two-chamber design
which provides two independently controlled rinsing and drying chambers for
increased flexibility and throughput. The Omega 1000 incorporates our patented
Surface Tension Gradient ("STG") drying technology and patented CleanPoint water
filtration system. This process is designed to reduce contamination and water
spots, which can be left by conventional equipment.

     The Omega 1000 system provides the following benefits to semiconductor
manufacturers:

     - No mechanical motion of wafers, thus preventing wafer breakage problems
associated with SRD's
     - Minimal moving parts provide higher system reliability and reduced
equipment maintenance cost
     - No particle contamination at 0.2 micron and above added to product wafers
by rinse/dry process
     - Reduced water spots and organic residues by eliminating the build-up of
water meniscus common in SRD's

Omega 2000

     The Omega 2000 system is an integrated cleaning, rinsing and drying system
that uses the same rinse and dry technology as in the Omega 1000 and couples it
with additional cleaning options and system control capabilities. The Omega 2000
system combines the advantages of immersion technology and the convenience of
full flow processors and is designed to process larger substrates at higher
throughputs. We offer chemical injection and megasonic cleaning as options on
the Omega 2000. We procure these cleaning subsystems from one of several
manufacturers of such systems. The Omega 2000 is available as a stand-alone
system or as a drop-in upgrade to an existing wet bench system. The drop-in
upgrade version of the Omega 2000 is being marketed to wet bench manufacturers
(Original Equipment Manufacturers or OEM's) as the Omega 2100 system.

     The Omega 2000 and the Omega 2100 provide the following advantages compared
to conventional equipment:






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     - Single chamber cleaning, rinsing and drying of wafers, eliminating
cumbersome handling
     - Improved rinse and dry cycle times for increased throughput
     - Reduced build-up of scum that sometimes occurs with IsoPropyl Alcohol
("IPA") dryers
     - Significantly lower usage of IPA, an environmentally hazardous material,
compared to conventional IPA dryers
     - Reduction in surface roughness and haze on wafers

Omega 4000

     The Omega 4000 is a cleaning, rinsing and drying system that builds on the
Omega 2000 product by offering an integrated hydrofluoric acid (HF) cleaning
capability in addition to the cleaning, rinsing, and drying capabilities found
on the Omega 2000 product. The HF cleaning module allows more thorough cleaning
of certain types of processed wafers than the Omega 2000. We procure the HF
capability from one of several manufacturers of such systems. The Omega 4000
system is also configured with robotics for wafer cassette handling.

     The list price of the Omega products ranges from $95,000 for the Omega 1000
to $500,000 for the fully configured Omega 4000.

     We are devoting substantial resources to the development of new types of
cleaning, rinsing and drying systems based on the development of new
technologies and our patented technologies that can greatly simplify and enhance
wet processing. No assurance can be given that these development efforts will be
successful or that any products developed will achieve commercial success.

STRATEGY

     Our goal is to become a leading provider of cleaning, rinsing, and drying
equipment used in modern semiconductor manufacturing facilities. We are
marketing our products and providing evaluation systems to leading IC and wafer
manufacturers for wet processing applications with a very high IC yield
leverage. We believe that integration of our products into the manufacturing
lines of several major semiconductor manufacturers will provide support for
sales into other manufacturers' facilities. In addition, we are marketing our
products to the research and development areas within the semiconductor
companies to gain acceptance of our technology in the development of future
semiconductor manufacturing processes that require lower contamination. We have
also achieved success in additional markets for our products in other defect
sensitive industries including magnetic disks, flat panel displays, and
photo-masks.

     We have adapted our products to capitalize on the expected shift in the
semiconductor industry from six and eight inch (150mm and 200mm) silicon wafers
to twelve inch (300mm) silicon wafers. That move will require IC manufacturers
to either refurbish existing manufacturing sites or construct new ones. During
the transition to larger wafers, we expect that semiconductor manufacturers will
reevaluate those aspects of the manufacturing process which have a significant
impact on yield, since the potential losses associated with reduced yield will
increase as wafer size increases and critical dimensions decrease.

     We also sell to manufacturers of wet benches who act as OEM's for us, and
incorporate our rinsing and drying systems into their existing or new automated
wet benches. Because many customers want automated wet benches which incorporate
rinsing and drying technologies such as that available from us, it is important
that we work with the manufacturers of automated wet benches to penetrate this
customer base. Generally, we sell our products to our OEM partners at a
discounted rate based upon volume purchases. We have previously announced such
OEM partner relationships and intend to continue our OEM relationships. We
expect a significant part of our future business may come from OEM sales.

     We are additionally targeting the magnetic disk and flat panel display
markets, and have achieved initial success in adapting our technology to the
needs of these industries. We have recruited qualified personnel and obtained
the required test and measurement system for our laboratory for this purpose. We
believe that a significant part of our future business may come from disk and
flat panel display manufacturers.



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CUSTOMERS, MARKETING AND SERVICE

     We are marketing our cleaning, rinsing, and drying systems for application
at several points in the IC fabrication process. Thus, potential customers with
large manufacturing facilities could potentially have use for several of our
products within a single facility. We have sold systems to semiconductor
manufacturers who have integrated our products into existing or new wet benches
or have used them in a stand-alone configuration. We have also sold systems to
semiconductor equipment manufacturers, magnetic disk manufacturers, flat panel
display manufacturers, and photo-mask manufacturers. We are collaborating with
several automated wet-bench manufacturers, for integrating our systems into the
wet-benches of these manufacturers.

     In the United States, we market our products through direct customer
contact and manufacturer representatives. These representatives provide sales
support to end-users in their territories. We use our own personnel to provide
service support for end-users in the United States. In Europe, we market our
products through divisions of Teltec Semiconductor, which provide both sales and
service support to end-users. In Japan, we distribute our products through
Kanematsu Semiconductor Corp., which provides both sales and service support to
end-users. Other distributors include Premtek in Taiwan, Sekwang Hitech Company
in South Korea, and WKK in Singapore. We have agreements with our
representatives and distributors which generally grant the representative or
distributor an exclusive right to sell products in a specified territory and
allow termination by either party without cause on 90 days written notice.

     In the United States, we use our own personnel for all equipment
installations, field service and maintenance. In Europe, we have agreements with
divisions of Teltec Semiconductor to perform all equipment installations, field
service and maintenance. In Japan, we have similar agreements with Kanematsu
Semiconductor, and are similarly using our distributors in Taiwan, Singapore and
South Korea. We typically provide customers with a twelve-month warranty
covering parts and labor.

     During 1997 and 1998, the major portion of our revenues came from shipments
to North America, with a smaller portion of revenues coming from shipments to
Asia-Pacific region and from shipments to Europe.

BACKLOG

     We schedule production of our systems based upon backlog, informal customer
commitments and general economic forecasts for our targeted markets. We include
in our backlog only those customer orders for systems for which we have accepted
purchase orders and for which delivery has been specified within twelve months,
as well as orders for spare parts and service and support of systems. We have
not entered into any long-term purchase agreements with any customers. Customers
commit to purchase our products by issuing purchase orders. The timing of the
purchase orders' issuance depends on the customer's delivery requirements.

     Our backlog of orders was approximately $1,348,520 as of December 31, 1998,
all of which we expect to deliver within the next six months. The systems
included in the backlog have been ordered by semiconductor manufacturers,
original equipment manufacturers, and magnetic disk manufacturers. The equipment
requirements of manufacturers cannot be determined with accuracy, and therefore
our backlog at any particular date is not indicative of future growth. In
addition, because of possible changes in delivery schedules, the ability of
customers to cancel, defer or reschedule, and potential delays in system
shipments, our backlog at any particular date is not necessarily representative
of actual sales of any succeeding period. Further, all potential sales will
depend on final delivery and testing of equipment.

MANUFACTURING, ASSEMBLY AND TESTING

     Our equipment manufacturing operations consist of assembly of subsystems
into final configuration and final testing in a cleanroom prior to customer
shipment. We fabricate certain custom plastic components that are incorporated
into our systems, and also procure subsystems and materials from a number of
distributors and multiple outside suppliers.

     Our strategic goal is to continue to use contract manufacturers for our
standard subsystems as manufacturing volume increases and product designs
mature. We do not have written contracts with our suppliers and choose suppliers
based on considerations of quality, cost and delivery time.




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PRODUCT DEVELOPMENT

     We incurred research and development expenses of $2,749,925 in 1998 and
$2,021,790 in 1997. Research and development expenses represent costs incurred
for the design and development of new products, the redesign of existing
products, and the costs associated with technology development. None of our
research and development costs in 1998 and 1997 were paid for by customers, or
other outside organizations.

     The market for semiconductor fabrication equipment is characterized by
rapid technological advancement and product innovation. We believe that
development of new products will be required to allow us to compete effectively
in the market. As of December 31, 1998, we had 20 full-time employees whose
duties included research and development. We intend to hire additional research
and development personnel in 1999.

     We have established an advanced applications laboratory complete with a
Class 1 cleanroom and measurement and test equipment to assist in the
development of our processes and products, perform customer demonstrations and
evaluations, and assure the quality of products shipped to customers. We intend
to continue our research and development activities through internal research
and cooperative research relationships with customers and other technology
companies.

     We intend to continue product enhancement programs focusing on improving
reliability and performance, developing additional features and capabilities,
increasing throughput capacity, promoting ease of equipment operations, and
reducing costs. We also believe we can improve standardization of our systems,
and improve product quality, reduce costs and shorten lead times using contract
manufacturing and pre-fabricated items.

EMPLOYEES

     On December 31, 1998, we had 55 full-time employees, including 20 in
manufacturing, 18 in research, engineering and product development, 11 in sales
and marketing and 6 in finance and administration. All of the employees were
located in the United States. No employee of YieldUP is currently represented by
a labor union. Management considers employee relations to be good.

     We intend to add employees from time to time as necessary to meet our
evolving management, research and development, sales and marketing, service and
manufacturing needs. We believe that our future success is dependent to a
significant degree on our ability to attract and retain additional skilled
personnel to enable us to develop our business and compete.

BUSINESS RISKS

     In addition to the other information in this Annual Report, the following
risk factors should be considered carefully in evaluating YieldUP and our
business. This Annual Report contains forward-looking statements that involve
risks and uncertainties. The statements contained in this Annual Report that are
not purely historical are forward-looking statements within the meaning of
Section 27A of the Securities and Exchange Act of 1934, including statements
regarding our expectations, beliefs, intentions, plans or strategies regarding
the future. All forward-looking statements included in this document are based
on information available to us on the date thereof, and we assume no obligation
to update any such forward-looking statements.

     Our operations are subject to numerous risks, including unforeseeable
expenses as well as specific risks of the semiconductor equipment industry. We
may never achieve profitable operations. See "Financial Statements" and the
accompanying Notes.

The Semiconductor Industry is Experiencing a Downturn Which May Materially and
Adversely Affect Us

     The semiconductor equipment industry is highly cyclical and has
historically experienced periodic and often prolonged downturns. Currently, the
industry is in the midst of such a downturn. We can neither predict nor avoid
such downturns. A downturn in the semiconductor industry could materially
adversely affect our backlog level, business, financial condition, and results
of operations. Any downturn in the market demand for integrated circuits would
likely reduce to an even greater extent the willingness of the manufacturers of
semiconductor devices to make substantial capital expenditures and would
adversely affect our business, financial condition, and results of operations.

We Have Experienced Operating Losses in the Past and We Expect to Sustain Losses
in the Future

     We have experienced significant operating losses since our inception in
June 1993 and only commenced significant shipments of





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our products in the fourth quarter of 1995. We have experienced net losses of
$11,361,922 in 1998, $3,993,642 in 1997 and $3,374,035 in 1996. Accordingly, we
have a limited operating history on which to base the evaluation of our
business, and our prior operating results are not indicative of the results
which may be achieved in the future. As of December 31, 1998, our accumulated
deficit was $20,949,936. Our operating losses have been and will continue to be
principally the result of the various costs associated with our product
development, manufacturing, and sales and marketing activities. We may never
achieve profitability if we remain an independent entity and FSI may not be able
to generate profits from the acquired operations of YieldUP.

     We believe that our existing capital resources will not enable us to fund
our operations through 1999. We will need to obtain additional capital to fund
our operations in 1999, which may result in dilution to the current
stockholders. The existence of Class B warrants may also complicate future
capital raising activities because of their potentially dilutive effect on the
purchasers of equity securities and the anti-dilution provisions of the Class B
warrants. These anti-dilution provisions could reduce the exercise price of the
Class B warrants. If we are unable to obtain the necessary capital, we will be
required to significantly curtail operations.

     In December 1998, we redeemed all outstanding shares of the Series A
preferred stock for approximately $6 million which significantly reduced our
available capital resources.

     On December 14, 1998, we issued a promissory note in the principal amount
of $500,000 to Abhay Bhushan, a director and chief financial officer of YieldUP,
bearing interest at the rate of nine percent (9.0%) per annum. The purpose of
the loan was to redeem the Series A preferred stock. The promissory note was
repaid in full on January 29, 1999.

     On March 4, 1998, we granted 2,439 five year warrants to a commercial
lender to purchase YieldUP common stock at an exercise price of $10.25 per
share, to secure a commitment to receive a loan for up to $500,000 for our
capital equipment, at an interest rate equal to the lender's prime rate (7.75%
at December 31, 1998) plus 1.75%, and to create a $4 million revolving credit
line collaterized by our qualifying accounts receivable, at an interest rate
equal to the lender's prime rate plus 1.25%. In November 1998, the revolving
credit line was reduced from $4,000,000 to $2,000,000. As of December 31, 1998,
we were not in compliance with certain covenants of the loan agreement. We
obtained a waiver of such non-compliance from the lender through January 31,
1999 and are currently in negotiation with such lender to restructure the
covenants and terms of the loans.


     On May 5, 1998, we issued 5,149 shares of common stock upon the net
exercise of a warrant held by a commercial lender.

Our Products Employ Proprietary Technology and this Technology May Infringe on
the Intellectual Property Rights of Third Parties

     We rely on patent, trade secret and copyright protection for our products
and technology. We have obtained eight United States patents since 1996 relating
to our cleaning, rinsing and drying products and technologies and have filed
twenty-four additional U.S. and foreign patent applications. The process of
obtaining patents can be expensive and our patent applications may not result in
the issuance of patents. Our issued patents may not provide us with meaningful
competitive advantages, and challenges may be issued against the validity and
enforceability of any patent issued to us.

     We also rely on trade secrets and proprietary technology that we seek to
protect, in part, through confidentiality agreements with employees, consultants
and other parties. However, these agreements may be breached, we may not have
adequate remedies for any breach, and our trade secrets may become known to or
independently developed by others.

     In the absence of significant patent or other proprietary protection,
competitors may be able to copy our technology or design approaches, replicate
our processes or gain access to our trade secrets. Moreover, our competitors may
be able to develop technologies similar to or more advanced than our products or
technology. Our current or future products may infringe on the patents of
others.

     There has been substantial litigation regarding patent and other
intellectual property rights in semiconductor-related industries. Increased
sales of our products could provoke additional claims of infringement from third
parties. In the future, litigation may be necessary to:

     - enforce patents issued to us;






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     - to protect trade secrets or know-how owned by us;
     - to defend us against claimed infringement of the rights of others; and
     - to determine the scope and validity of the proprietary rights of others.


     Any such litigation would likely result in substantial cost and diversion
of effort, which by itself could have a material adverse effect on our business,
financial condition and operating results. Further, adverse determinations in
such litigation could result in the loss of proprietary rights, subject us to
significant liabilities to third parties, require us to seek licenses from third
parties or prevent us from manufacturing or selling our products, any of which
could have a material adverse effect on our business, financial condition and
results of operations. See "Legal Proceedings."

We May Not Be Able To Successfully Compete in the Highly Competitive
Semiconductor Manufacturing Market

     There is intense competition in the markets for our products. Our smaller
resources and yet to be fully proven products make us extremely vulnerable to
competition from larger companies, many of which have significantly greater
financial, employee, product development and marketing resources. Leading
competitors have a larger installed base of products which can provide them with
a significant advantage over us because our technology has not been widely
deployed and therefore presents potential customers with uncertainty not
associated with existing equipment. In addition, many semiconductor
manufacturers are reluctant to choose small companies as key suppliers due to
concerns about long term viability and product support. We may not be able to
overcome these disadvantages.

     Competition for our products currently comes from makers of traditional and
new cleaning, rinsing, and drying equipment. These competitors may be able to
develop new products or improve their existing products which, when combined
with their existing market presence, would make our products obsolete or
unmarketable. Any such development would have a material adverse effect on us.
We may not be able to penetrate the wet processing equipment market and convince
semiconductor or other manufacturers to install our systems either directly or
through retrofitting in place of existing equipment. Additional competition for
our products also currently comes from a large number of small companies making
cleaning, rinsing, and drying equipment which is less expensive than our
products. Because our products sell for significantly higher prices than such
products, we may not be able to compete effectively against them without
lowering our prices.

     We also expect that competition may arise from new competitors and from new
technological approaches adopted by new and existing competitors. Because of the
increasing focus on yield management in the semiconductor manufacturing
industry, equipment manufacturers are likely to put an increased emphasis on
contaminant reduction. Thus, competitive technologies or new manufacturing
techniques may be developed which could make our products obsolete, thereby
materially adversely affecting us. If we are unable to respond to the challenges
of competition, including changes in cleaning, rinsing, and drying of
semiconductor or other manufacturing processes, we may not able to achieve or
maintain profitability at a level required to support our survival or growth.

     Our competitors include manufacturers of spin rinse dryers such as Verteq
and Semitool, IsoPropyl alcohol dryer manufacturers such as S&K and integrated
wet processing system manufacturers such as SCP Global Technologies, Sub Micron
Systems, Steag, FSI International, CFM Technologies, and Dai Nippon Screen.
Several of these competitors are also our customers.

     We currently compete principally on the basis of superior contamination
reduction, better price/performance, improved equipment reliability, smaller
footprint, lower operating costs, and reduction in hazardous chemical usage. We
believe that these factors as well as the ease of use, price, reputation,
service and familiarity are important competitive criteria for selection of
cleaning, rinsing and drying equipment by potential customers. These factors may
not give us a competitive edge in the future and any failure to do so may have a
material adverse impact on our business or operating results.

We May Not Be Able To Adequately Diversify Our Products

     We anticipate that the substantial majority of our future revenues will
come from sales of our cleaning, rinsing, and drying systems. Our revenues
declined in 1998 partially as a result of a substantial downturn in the
semiconductor industry. Should the demand for, or pricing of, our products
decline due to:





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     - increased competitive pressure;
     - the introduction of superior systems or processes;
     - changes in the semiconductor, magnetic or optical disk, flat panel
display or photo-mask industries; or
     - other factors; then

our business, financial condition and results of operations would be materially
adversely affected.

     Our ability to diversify our operations through the introduction and sale
of new products and broader acceptance of our cleaning, rinsing, and drying
systems is dependent on the success of our continuing research, product
development and engineering activities, as well as our marketing efforts. We may
not be able to develop, acquire, introduce or market new products in a timely or
cost-effective manner and any new products or improvements we develop may not
achieve market acceptance or result in acceptable profit margins.
Accordingly, we are dependent on overall market acceptance of our products.

Our Operating Results Can Vary Substantially From Quarter To Quarter

     We expect to derive a substantial portion of our revenues from the sale of
a relatively small number of systems, which typically range in list price from
$95,000 to $500,000. As a result, a small reduction in number of systems shipped
in a quarter due to changing demand, rescheduling or cancellation of an order,
or supplier delays would have a material adverse effect on our revenues and
results of operations for that quarter.

     In addition, our need for continued investment in research and development
and sales, marketing and service will limit our ability to reduce expenses in
response to any such decrease in sales. If our anticipated level of revenues is
not achieved for a particular period, our operating results could be adversely
affected by our inability to reduce costs. Because we build certain
sub-assemblies according to forecast, a reduction in customer orders could also
result in excessive inventories which could adversely affect our results of
operations and liquidity. The impact of these and other factors on our operating
results in any future period cannot be accurately forecast.

We May Not Have an Adequate Supply of Our Product Because We Depend on Third
Parties for Supplies

     We have no written contracts with any of our key suppliers, and such
suppliers may terminate our relationships with us at any time without notice.
Any such termination would materially impair our ability to satisfy any orders
for our products and would materially adversely affect our results of
operations. If any of our outside suppliers terminate their relationship with
us, we will be required to replace such suppliers. In such an event, we may not
be able to find replacement suppliers and such replacement suppliers may be more
expensive than our current suppliers, thereby materially adversely affecting our
results of operations.

It Takes A Long Time To Sell Our Products

     Sales of our products have been, and are expected to continue to be,
characterized by a relatively long sales cycle, generally six to nine months,
due to such factors as the substantial time required by potential customers for
technical evaluation of our products prior to purchase, and the high cost and
the critical role our products will play in the manufacturing process. We
believe that the sales cycle will continue to be lengthy as certain of our
anticipated customers centralize purchasing decisions, which is expected to
intensify the evaluation process and require additional sales and marketing
expenditures by us.

In Order To Compete Effectively in the Semiconductor Market, We Need to Develop
New Products That Are Acceptable To Our Clients

     Semiconductor, magnetic disk, flat-panel display and photo-mask
manufacturing equipment and processes are subject to rapid technological changes
and product obsolescence. We believe that our future success will depend in part
upon our ability to develop and enhance our current products and develop new
products, processes and technologies to meet such anticipated changes. If we do
not successfully introduce new products in a timely manner, any competitive
position we may develop could be lost, and our sales reduced. We may not be able
to develop and introduce new products which satisfy customer needs and achieve
market acceptance. If we fail to manage our research and development efforts,
such failure will have a material adverse effect upon our business and 
prospects.




                                       9
<PAGE>   10

The Loss of a Single Customer May Have an Adverse Effect on Our Business

     Historically, we have sold a significant proportion of our systems in each
period to a limited number of customers. For example, our three top customers
accounted for 30% of gross revenues in 1998 and 34% of our revenues in 1997. A
single customer accounted for 11.8% of gross revenues in 1998 and 19.8% in 1997.
As a particular customer starts or expands a new facility or production line,
sales to that customer may increase sharply; conversely, as a customer completes
a facility or discontinues a production line, sales to that customer may
decrease sharply. The failure to replace such sales with sales to other
customers in succeeding periods would have a material adverse effect on our
business, financial condition and results of operations. We expect that sales to
relatively few customers will continue to account for a high percentage of our
revenues in any accounting period in the foreseeable future. A reduction in
orders from any customer or the cancellation of any significant order could have
a material adverse effect on our business, financial condition and results of
operations. None of our customers have entered into a long-term agreement
requiring them to purchase our products.

We Depend on Third Parties to Increase Our Sales Potential

     An increasing percentage of our revenues is derived from sales to Original
Equipment Manufactures ("OEM") customers. We sell our cleaning, rinsing, and
drying systems to OEM's and they in turn integrate our systems into their larger
semiconductor manufacturing equipment. The timing and amount of sales to these
OEM customers ultimately depend on sales levels and shipping schedules for the
OEM products into which our products are incorporated. We have no control over
the shipping dates or volumes of products shipped by our OEM customers and OEM
customers may not continue to ship products that incorporate our products at
current levels, or at all.

     Many of the markets in which our OEM customers operate have experienced
cyclical declines and advances. Cyclical downturns have been characterized by
reduced product demand and price erosion. Further, such downturns may adversely
affect the ability of our OEM customers to make payments for our products in a
timely manner, or at all, which could materially adversely affect our business,
financial condition and operating results. Generally, our OEM customers may
terminate orders at any time without penalty. Failure of these OEMs to achieve
significant sales of products incorporating our products and fluctuations in the
timing and volume of such sales could have a material adverse effect on our
business, financial condition and results of operations.

     The loss of, or any reduction in, orders by a significant OEM customer
could have a material adverse effect on our business, financial condition and
results of operations. We may not able to maintain or continue to increase the
level of our sales in the future and we may not be able to retain existing OEM
customers or attract new ones.

We are Directly Impacted by International Affairs

     Export sales to our international customers outside North America,
primarily to Japan and Europe, comprised approximately 33% of our gross revenues
in 1998, 32% in 1997 and 33% in 1996.

     We believe that the economic turmoil in Asia has had an adverse effect on
our operations. Sales to customers outside the United States are subject to
risks, including:

     - exposure to currency fluctuations;
     - the imposition of governmental controls;
     - the need to comply with a wide variety of foreign and U.S. export laws;
     - political and economic instability;
     - trade restrictions;
     - changes in tariffs and taxes;
     - longer payment cycles typically associated with foreign sales;
     - the greater difficulty of administering business overseas; and
     - general economic conditions.







                                       10
<PAGE>   11



     In addition, the laws of certain foreign countries may not protect our
intellectual property to the same extent as do the laws of the United States.
Although to date our results of operations have not been adversely affected by
currency exchange rate fluctuations because we have invoiced all of our
international sales in United States dollars, our results of operations could be
adversely affected by currency fluctuations in the future.

We have Issued Class B Warrants That Will Dilute Stockholders When They Are
Exercised

     We have approximately 4,155,421 Class B warrants outstanding. Each Class B
warrant entitles the holder to acquire one share of common stock upon payment of
the exercise price of $11.00. Such exercise price may be reduced under certain
circumstances. The holders of Class B warrants will likely only exercise their
purchase right at a time when the price of the common stock is higher than
$11.00 per share, if the Merger is not consummated holders of common stock at
the time of exercise will suffer dilution.

Our Officers and Directors Control a Substantial Amount of Our Stock and
Therefore Can Influence Any Stockholder Vote

     Holders of YieldUP's Class A common stock are entitled to five votes for
each share owned by them on all matters submitted to a vote of the stockholders,
while holders of common stock are entitled to one vote per share. Our directors
and officers control approximately 52% of the voting power and are able to elect
all of our directors and, hence, are able to control the affairs of YieldUP. In
addition, our directors and officers, subject to certain limitations imposed by
applicable law, are able to, among other things, amend our certificate of
incorporation and bylaws and effect or preclude fundamental corporate
transactions involving YieldUP, including the acceptance or rejection of any
proposals relating to a merger or an acquisition of YieldUP by another entity,
in each case without the approval of any of our other stockholders. If the
Merger is not consummated, these officers and directors will continue to control
YieldUP.

Our Charter Documents May Inhibit a Takeover

     The Board of Directors has authority to issue up to 4,997,600 shares of
preferred stock and to fix the rights, preference, privileges and restrictions,
including voting rights, of those shares without any further vote or action by
the stockholders. If the Merger is not consummated, then the rights of the
holders of the common stock will be subject to, and may be adversely affected
by, the rights of the holders of the preferred stock that may be issued in the
future. The issuance of preferred stock, while providing desirable flexibility
in connection with possible acquisitions and other corporate purposes, could
have the effect of making it more difficult for a third party to acquire a
majority of our outstanding voting stock, thereby delaying, deferring or
preventing a change in control of YieldUP. Furthermore, such preferred stock may
have other rights, including economic rights senior to the common stock, and, as
a result, the issuance thereof could have a material adverse effect on the
market value of the common stock.

We Could Be Delisted From The Nasdaq SmallCap Market

     While our common stock meets the current Nasdaq SmallCap Market
requirements, such securities may not continue to meet the continued listing
requirements. Under current criteria for continued inclusion on the Nasdaq
SmallCap Market:

     - we will have to maintain at least $2 million in total net tangible assets
or a market capitalization of $35 million or have $500,000 in net income;
     - the minimum bid price of the common stock will have to be at least $1.00
per share;
     - there must be at least 500,000 shares in the public float valued at $1
million or more;
     - the common stock must have at least two active market makers; and o the
common stock must be held by at least 300 holders.

     On December 8, 1998, our Class B Warrants were delisted from the Nasdaq
SmallCap Market because there were no longer any active market makers registered
to trade the securities. The trading of these securities, if any, is being
conducted in the over-the-counter market in NASD's "OTC Bulletin Board."

     If the Merger is not consummated and we are unable to satisfy the Nasdaq
SmallCap Market's maintenance requirements, our securities may be delisted from
the Nasdaq SmallCap Market. In such event, trading, if any, in the common stock
would thereafter be conducted in the over-the-counter market in the so-called
"pink sheets" or the NASD's "OTC Bulletin Board." Consequently, the





                                       11
<PAGE>   12



liquidity of our securities could be impaired, not only in the number of
securities which could be bought and sold, but also through delays in the timing
of transactions, reduction in security analysts' and the news media's coverage
of YieldUP, and lower prices for our securities than might otherwise be
obtained.

     Our securities have not been qualified or registered in all states and will
not be eligible for trading unless an exemption from the qualification or
registration requirements is available. Such an exemption may not become
available in any jurisdiction.

Our common stock Could Be Reclassified As "Penny Stock" and Subject To
Burdensome Restrictions

     The Commission has adopted regulations which define a "penny stock" to be
any equity security that has a market price less than $5.00 per share or with an
exercise price of less than $5.00 per share, subject to certain exceptions. For
any transaction involving a penny stock, unless exempt, the rules require
delivery, prior to any transaction in a penny stock, of a disclosure schedule
prepared by the Commission relating to the penny stock market. Disclosure is
also required to be made about current quotations for the securities and about
commissions payable to both the broker-dealer and the registered representative.
Finally, broker-dealers must send monthly statements to purchasers of penny
stocks disclosing recent price information for the penny stock held in the
account and information on the limited market in penny stocks.

     The foregoing penny stock restrictions will not apply to our securities if:

     - they are listed on the Nasdaq SmallCap Market;
     - certain price and volume information is publicly available on a current
and continuing basis; and 
     - we meet certain minimum net tangible assets or average revenue criteria.

     Our securities may not qualify for exemption from the penny stock
restrictions. If our securities were subject to the rules on penny stocks, the
market liquidity for our securities could be severely adversely affected.

We Do Not Pay Dividends

     We have never paid any cash dividends on our common stock or Class A common
stock. We anticipate that in the future, earnings, if any, will be retained for
use in the business or for other corporate purposes, and it is not anticipated
that cash dividends in respect of the common stock or Class A common stock will
be paid.

The Failure of Our Systems, Key Suppliers and Customers To Be Year 2000
Compliant Could Negatively Impact Our Business

     By the year 2000, most companies could face a potentially serious
information systems problem because many software applications and operational
programs written in the past were designed to handle dates formatted with
two-digit years and thus may not properly recognize calendar dates beginning in
the Year 2000 (Y2K). This problem could result in computers either outputting
incorrect data or shutting down altogether when attempting to process a date
such as "01/01/00".

     In order to minimize the disruption to business and government that may be
caused by computer systems and software products that are not Y2K compliant,
many companies and government agencies worldwide have established programs to
evaluate and mitigate the risks and adverse effects of the Y2K problem.
Accordingly, YieldUP formed a Y2K Readiness team in 1998, comprising Information
Technology personnel, finance and administration staff and product software
engineers. The team has assessed all critical software and operational
applications for review and evaluated Y2K compliance of its internal business
systems, manufacturing and design tools, current products, products sold in
recent years, and the most critical systems, services and products supplied to
the Company by third parties.

     A four-step approach, comprising assessment, remediation, testing and
implementation, was used to determine the Y2K readiness of our systems, software
equipment and products. Such an approach provided a detailed method for tracking
the evaluation, repair and testing of systems, software, equipment and products
that may be affected by Y2K issues.

     In the first step, we prepared an inventory of all systems, software,
equipment and products that we use internally or market as products to
customers. We then determined whether equipment met Y2K compliance. This
involved detailed analysis of the





                                       12
<PAGE>   13



products by utilizing the Internet and contacting the vendors directly. Letters
of compliance were collected and organized into a centralized location. Any
systems that did not meet compliance were identified.

     The second step included repairing, upgrading and/or replacing any
non-compliant equipment or systems identified in the first step. This included
developing and implementing methods for immediately bringing them up to
compliance standards.

     In the third step, we tested our systems, software and equipment for Y2K
readiness, or in certain cases, relying on test results or certifications
provided by third parties to us.

     The fourth step involved placing compliant systems, software and equipment
into service.

     A few issues were discovered with systems utilized in YieldUP's day-to-day
operations and with one of YieldUP's products. Solutions to these problems were
quickly addressed, resolved and tested by working with each vendor. The costs to
address the Y2K issues have been relatively small to date, and our products in
the field have been made compliant. Completion date for these issues was
December 1998. Final analysis of our readiness will be completed by the middle
of 1999. We have further implemented policy and procedures that all new systems
procured or developed are evaluated for Y2K readiness to assure compliance. In
the latter half of 1999, we will be finalizing contingency plans, to respond to
any unforeseen Y2K problems.

     An analysis of the products that we market to customers was conducted in
the latter half of 1998. This analysis included the hardware, software and
firmware used in our products. Items tested were the computer systems that
control the products, hardware and the software for the products. An issue was
found with one of the software packages used on one of the products. Issues
found are not critical to the functionality of the system as a whole and the
product will continue to operate. Software patches are required for the software
to be Y2K compliant. Procedures have been written and any and all software
upgrades have been collected and distributed to all of our existing customers.
The patches were provided free-of-charge by the software package vendor. The
total cost to address the Y2K problem and upgrade any current business systems
is estimated to not be more than $25,000.

     We believe we are diligently addressing the Y2K issues and that we will
satisfactorily identify and resolve all critical and significant Y2K problems in
our operations and products by the middle of 1999. The assessment and
remediation plan we have implemented is expected to significantly reduce the
level of uncertainty about the Y2K problem in our internal systems, our products
and our critical third-party suppliers. We are devoting the necessary resources
to identify and resolve any potential present or future Y2K issues.

      We expect that the financial institutions and customers are also devoting
resources to resolve their Y2K issues. Other than any pervasive problem, over
which we have no control, we do not expect the Y2K problem to have any material
adverse effect on our business, operating results or financial condition.

We May Not Be Able To Retain Key Engineering, Marketing, Sales and Management
Personnel Needed for Our Success

     Our success will, to a large extent, depend upon the continued services of
our executive officers including in particular Raj Mohindra, President and Chief
Executive Officer. The loss of services of these executive officers could
materially adversely affect us. We do not have employment agreements with any of
our key personnel, but we are the beneficiary of key man life insurance in the
amount of $2 million on Mr. Mohindra.

     Our success will also depend, in part, upon our ability to retain the
personnel who have assisted in the development of our products, and to attract
and retain additional qualified operating, marketing, technical and financial
personnel. The competition in the semiconductor equipment industry for such
qualified personnel is often intense and we may not be able to hire or retain
necessary personnel.


ITEM 2.  DESCRIPTION OF PROPERTY

     Our principal administrative, manufacturing, engineering and development,
and sales/ marketing facilities occupy approximately 14,400 square feet in a
single story building in Mountain View, California. The property is in good
condition and is occupied under a lease that expires in September 2001. We have
also leased an additional 3,000 square feet for our expanded Sales and Marketing





                                       13
<PAGE>   14



Operations in Pleasanton, California. The property is in good condition and is
occupied under a lease that expires in October 2000.
Management believes that our facilities should be adequate for our operations
for at least the near term.

ITEM 3.  LEGAL PROCEEDINGS

     CFM Technologies, Inc. and CFMT, Inc. (collectively "CFM") filed a
complaint against us in United States District Court for the District of
Delaware in September 1995. The complaint alleged that the drying process
incorporated in certain of our products infringes a patent held by CFM. On
October 14, 1997, a federal court for the District of Delaware ruled in our
favor. In a written opinion granting summary judgment for us, the United States
District Court held that CFM had failed to produce evidence on three separate
elements of the patent claim. To establish infringement, evidence of all three
elements was required. On June 30, 1998, the United States District Court of
Delaware granted CFM's petition for re-argument of the summary judgment motion,
and the re-argument briefs have been filed by both parties. The court may not
sustain its original order. If the original order is overturned, the litigation
may proceed to trial, and the litigation and the associated costs may, and an
unfavorable adjudication will, have a material adverse impact on us. A loss, if
any, resulting from an unfavorable adjudication, cannot presently be estimated.
Accordingly, no provision for any liability that may result upon adjudication
has been made in the accompanying financial statements.

     CFM filed an additional complaint against YieldUP in United States District
Court for the District of Delaware on December 30, 1998. The complaint alleged
that the cleaning process incorporated in certain of our products infringes
patents held by CFM. We believe that the additional CFM patent infringement
lawsuit is without merit and that none of our technology and products infringe
any of the CFM patents asserted in that litigation. Our technology is
substantially different from CFM's patented technology. We plan to vigorously
defend our intellectual property rights against any and all claims. The
associated costs may, and an unfavorable adjudication will, have a material
adverse impact on us. A loss, if any, resulting from an unfavorable
adjudication, cannot presently be estimated. Accordingly, no provision for any
liability that may result upon adjudication has been made in the accompanying
financial statements.



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

     No matters were submitted to a vote of the security holders during our
fourth quarter.


PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

PRICE RANGE OF COMMON STOCK

     Since November 1995, our common stock has traded on the Nasdaq SmallCap
Market under the symbol "YILD." The following table sets forth for the periods
indicated the high and the low sale prices of the common stock as reported by
the Nasdaq SmallCap Market. These figures reflect the inter-dealer prices
without retail markup, mark-down or commission and may not represent actual
transactions.


<TABLE>
<CAPTION>
                                               HIGH              LOW
                                              -------          ------
<S>                                          <C>              <C>
                1997
                1st Quarter .........        $ 10 7/8         $ 5 5/8
                2nd Quarter .........          13 1/4           6 3/8
                3rd Quarter .........          15 1/8          11 3/4
                4th Quarter .........          14 3/8           8 3/8
                1998
                1st Quarter .........        $13 1/16         $ 9 1/2
                2nd Quarter .........          10 7/8           4 7/8
                3rd Quarter .........           5 1/2           1 1/4
                4th Quarter .........           3 1/2             1/2
</TABLE>





                                       14
<PAGE>   15



   On December 31, 1998, the last reported sale price of the common stock on
the Nasdaq SmallCap Market was $1 3/4 per share. As of December 31, 1998, there
were 25 holders of record of the common stock and 22 holders of record for the
Class A common stock, and we believe that there were over 1500 beneficial owners
of common stock.

DIVIDEND POLICY

     We have not paid any cash dividends on our common stock or Class A common
stock. It is our present policy is to retain any earnings to finance the growth
and development of our business, and, therefore, we do not anticipate paying
cash dividends on our common stock or Class A common stock in the foreseeable
future.

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS

     The information in this section contains forward-looking statements
describing our plans to increase revenues and gross margins on our products and
for debt and equity financing to meet our capital needs. Such statements are
made in reliance on the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Our plans and intentions with respect to
increasing revenues and improving gross margins are subject to risks and
uncertainties, and actual results could differ materially from those projected
in the forward-looking statements. Our ability to execute our plans may be
adversely affected by competitive conditions, failure to timely complete
development and installation of new products and product enhancements, supply
disruptions, customer purchasing cycles and other factors described under
"Business Risks" and elsewhere in this Annual Report.

RESULTS OF OPERATIONS

     During the year ended December 31, 1998 our revenues, net of sales returns
of $512,000 and an additional provision for returns of $747,429 were $6,732,574,
compared to $7,465,447 for the year ended December 31, 1997. The decrease in net
revenues of 10% in 1998 over 1997 was due to a decrease in the level of
shipments, sales returns and provision for returns for our cleaning, rinsing,
and drying systems due to adverse industry conditions. Gross sales for 1998 were
$7,992,003, compared to $7,465,447 for 1997. The industry downturn became very
severe in the third quarter of 1998, and we experienced product returns for the
first time in our history. As a result of these unfavorable business conditions,
we reexamined all of our receivables and inventory on hand, and recorded a
provision for sales returns as well as a $2,740,910 provision for excess
inventory. We have further implemented a policy of revenue recognition only on
letter of credit or receipt of cash for certain of our customers. We continue to
modify and improve our products, generally based on feedback from our customers
and as a result have increased our sales to OEM's, and our export sales to
Europe.

     During the year ended December 31, 1998, sales to a single U.S. customer
accounted for 11.8% of gross revenues, sales to a customer in Europe accounted
for 9.4% of gross revenues, and sales to an OEM customer accounted for 9.1% of
gross revenues. Gross sales to OEM's accounted for 31% of gross revenues during
the year ended December 31, 1998 compared to 17% of gross revenues during the
same period a year ago. Export sales to customers outside North America
accounted for 33% of gross revenues (20% in Europe and 13% in the Asia Pacific
region) during the year ended December 31, 1998 compared to 32% of gross
revenues (11% in Europe and 21% in the Asia Pacific region) during the same
period a year ago.

     Backlog at December 31, 1998 totaled approximately $1,348,520 compared to
approximately $2,517,000 at December 31, 1997. New orders for the fourth quarter
of 1998 were $1,988,374. The continuing slowdown in the semiconductor equipment
and disk drive industries may negatively impact our ability to book new orders
in the future until there is a change in the conditions that are reducing
capital equipment spending by manufacturers.

     Our cost of sales was $7,309,387 for the year ended December 31, 1998, and
$5,964,228 for the year ended December 31, 1997. Our gross deficit was $576,813
or 8.6% for the year ended December 31, 1998, compared to a gross margin of
$1,501,219 or 20.1% for the year ended December 31, 1997. The gross deficit was
due to lower than expected revenues, sales returns and provision for sales
returns of $1,259,429, and a provision for excess inventory of $2,740,910. Our
cost of sales remained high during 1998 due to manufacturing expenses being
allocated over relatively few units. We expect that future gross margins should
improve to the extent unit shipments and revenue increase and we are able to
continue our transition to increased shipments of standardized products and
lower unit material costs.

     Research and development expenses were $2,749,925 for the year ended
December 31, 1998, and $2,021,790 for the year ended December 31, 1997. The
increase in research and development expenses was due mainly to an increase in
engineering personnel and





                                       15
<PAGE>   16




an increase in expenses for prototype development of our new products compared
to 1997. Research and development expenses increased as a percentage of net
revenues to 40.8% in 1998 from 27.1% in 1997 due to decreased revenues and
increased research and development activity. In 1998, we continued to invest in
enhancement of our existing product line and started the development of new
technology and products. We expect to continue to invest in new product research
and development and enhancement of existing products, although these expenses
may decline as a percentage of revenues to the extent revenues increase.

     Selling, general, and administrative expenses were $4,877,568 for the year
ended December 31, 1998, and $3,724,100 for the year ended December 31, 1997.
The increase in selling, general, and administrative expenses reflected the
increase in bad debts and a provision for bad debt due to adverse industry
conditions, and increased legal expense for litigation and patent activity
compared to 1997. Selling, general and administrative expenses increased as a
percentage of net revenues to 72.4% in 1998 from 49.9% in 1997 due to decreased
revenues and increased bad debt expense. We expect that selling, general, and
administrative expenses will decline as a percentage of revenues to the extent
revenues increase and industry conditions improve.

     Net interest income was $173,346 for the year ended December 31, 1998, and
$251,029 for the year ended December 31, 1997. The decrease in net interest
income in 1998 was due to lower investment and cash balances in 1998 when
compared to 1997, as a result of the increased losses resulting from the
industry downturn. We expect that interest income may decline in the future due
to lower investment and cash balances caused by operating losses in 1998, and
the redemption of the convertible preferred stock.

     We sustained a net loss applicable to holders of common stock of
$11,361,922 for the year ended December 31, 1998, as compared to a net loss of
$3,993,642 for the year ended December 31, 1997. The net loss in 1998 included a
special charge of $2,666,867 related to the insolvency of a semiconductor
equipment manufacturer in which we had an equity interest, loan advances and
outstanding receivables, accretion on redeemable convertible preferred stock of
$1,330,962, and a provision for excess inventory of $2,740,910. Excluding these
items, the net loss for 1998 would have been $4,623,183. The net loss in 1997
included an $808,469 inventory write-off, due primarily to a decision by
management to discontinue our old product lines, and a non-cash expense of
$300,000 in the first quarter of 1997 related to an amendment to certain of our
Class A Warrants to resolve a potential dispute with holders of such warrants
with respect to the effectiveness of a resale registration statement relating to
such Class A Warrants. Excluding these two items, the net loss for 1997 would
have been $2,885,173. The continued net loss in 1998 was due primarily to
reduced revenues as a result of the severe industry downturn, the continued
product development activities and the provision for excess inventory. Net
losses are expected to continue until we are able to sell sufficient numbers of
cleaning, rinsing and drying systems to cover operating expenses, of which there
can be no assurance.


LIQUIDITY AND CAPITAL RESOURCES

     Our primary source of liquidity during the year ended December 31, 1998 has
been the cash flow generated from the private placement of 600 Series A
Convertible Preferred Shares ("Series A Shares"), completed on March 30, 1998.
We raised net proceeds of approximately $5.76 million from the sale of the
Series A Shares which we used for general working capital purposes. During 1998,
we issued 2,470,588 shares of common stock upon the conversion of 134 Series A
Shares into common stock, according to the terms of the agreement with the
Series A stockholders. On December 21, 1998, we redeemed all of the remaining
466 outstanding Series A Shares for a cash payment of approximately $6 million.
As of December 31, 1998, we had cash and cash equivalents of $143,228, and
short-term investments of $10,000, accounts receivable of $1,401,413, and
inventories, net of reserve for excess inventory, of $2,788,037.

     On March 4, 1998, we secured a commitment from a commercial lender to
receive a loan up to $500,000 for our capital equipment, at an interest rate of
the lender's prime rate (7.75% at December 31, 1998) plus 1.75%, and to
establish a $4 million revolving credit line collaterized by our qualifying
accounts receivable, at an interest rate of the lender's prime rate plus 1.25%.
In November 1998, the revolving credit line was reduced from $4,000,000 to
$2,000,000. As of December 31, 1998, we were not in compliance with certain
covenants of the loan agreement. We obtained a waiver of such non-compliance
from the lender through January 31, 1999 and are currently in negotiation with
such lender to restructure the covenants and terms of the loans.

     On December 14, 1998, we issued a promissory note in the principal amount
of $500,000 to Abhay Bhushan, a director and chief financial officer of YieldUP,
bearing interest at the rate of nine percent (9.0%) per annum, to enable the
redemption of the Series A Shares. The promissory note was repaid in full on
January 29, 1999.





                                       16
<PAGE>   17

     Net cash used for operating activities was approximately $4,314,000 during
the year ended December 31, 1998, and $9,948,000 during the year ended December
31, 1997. The decrease in cash used for operating activities during 1998 was
primarily attributable to the increase in collection of accounts receivable and
reduction in purchases of inventory as compared to the cash used for operating
activities during 1997. This decrease in cash used was partially offset by a
reduction in our accounts payable and accrued liabilities during 1998.

     Net cash provided by investing activities was approximately $924,000 during
the year ended December 31, 1998 as compared to net cash used for investing
activities of approximately $3,187,000 during the year ended December 31, 1997.
The increase in cash provided by investing activities during 1998 primarily
reflects the proceeds from sales of short-term investments.

     Our financing activities provided net cash of approximately $1,388,000 for
the year ended December 31, 1998, and approximately $14,662,000 for the year
ended December 31, 1997. The decrease in the cash provided by financing
activities primarily resulted from the decrease in cash provided by stock
issuances during 1998 as compared to 1997 and the redemption of Series A Shares
during 1998. In addition, during 1998, we increased our borrowings and received
$1,498,000 in proceeds from notes payable compared to $250,000 in 1997, and the
availability of $407,000 in 1998 from a decrease in restricted cash. We repaid
$330,000 and $360,000 of our bank borrowings in 1998 and 1997, respectively.

     On January 21, 1999, we entered into a definitive agreement with FSI, for
FSI to acquire all of the outstanding stock of YieldUP. The form of the
transaction will be a merger ("the Merger"). Under the terms of the definitive
agreement, the YieldUP stockholders will receive $0.7313 in cash and 0.1567 of a
share of FSI common stock for each share of YieldUP common stock. YieldUP option
holders will receive substitute options entitling them to purchase FSI common
stock. When the Merger becomes effective, each outstanding warrant to purchase
shares of our common stock under any warrant agreement will become a right to
acquire FSI common stock. The warrants will be subject to substantially the same
terms and conditions as they were prior to the Merger. Each warrant, upon
payment of the exercise price, will entitle the holder to receive $.7313 cash
and .1567 of a share of FSI common stock for each share of YieldUP common stock
the warrant holder is entitled to. Completion of the transaction is subject to
certain closing conditions including, among other things, approval by the
stockholders of YieldUP. FSI and YieldUP anticipate that the transaction will be
completed in late April or early May of 1999. As part of the agreement to be
acquired by FSI, we also granted FSI a non-exclusive royalty-bearing license to
our patent portfolio.

     We believe that our existing capital resources will not enable us to fund
our operations through 1999. We will be required to seek additional capital if
we fail to merge with FSI, which may result in significant dilution to the
current stockholders. If we are unable to obtain the necessary capital, our
business, financial, and operating results may be materially adversely affected.






                                       17
<PAGE>   18

ITEM 7.  FINANCIAL STATEMENTS

                          INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
YieldUP International Corporation:

     We have audited the accompanying balance sheet of YieldUP International
Corporation (the "Company") as of December 31, 1998, and the related statements
of operations, stockholders' equity, and cash flows for each of the years in the
two-year period then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of YieldUP International
Corporation as of December 31, 1998, and the results of its operations and its
cash flows for each of the years in the two-year period then ended in conformity
with generally accepted accounting principles. 

     The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations
that raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to this matter are also described in Note 2. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.


                                                                   KPMG LLP

Mountain View, California
February 5, 1999



                                       18
<PAGE>   19





                       YIELDUP INTERNATIONAL CORPORATION

                                 BALANCE SHEET


<TABLE>
<CAPTION>
                                                                            DECEMBER 31,
                                                                               1998
                                                                           ------------
<S>                                                                        <C>         
                                              ASSETS
Current assets:
   Cash and cash equivalents                                               $    143,228
   Short-term investments                                                        10,000
   Accounts receivable, net of allowance for doubtful accounts                1,401,413
   Inventories, net of reserve for excess inventory                           2,788,037
   Prepaid expenses and other current assets                                     76,431
                                                                           ------------
        Total current assets                                                  4,419,109
                                                                           ------------
Property and equipment                                                        1,500,712
Other assets                                                                    206,712
                                                                           ------------
        Total assets                                                       $  6,126,533
                                                                           ============

                               LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable                                                        $    747,730
   Accrued liabilities                                                          616,997
   Current portion of capital lease obligations                                  15,994
   Bank borrowings                                                            1,223,963
   Note payable to a director of the Company                                    500,000
                                                                           ------------
        Total current liabilities                                             3,104,684
                                                                           ------------
   Capital lease obligations, less current portion                               66,985
                                                                           ------------
        Total  liabilities                                                    3,171,669
Stockholders' equity:
   Preferred stock
     $.001 par value; 5,000,000 shares authorized;
     no shares issued and outstanding                                                --
   Class A common stock
     $.001 par value; 2,229,927 shares authorized;
     1,364,497 shares issued and outstanding
     each share is entitled to five votes                                         1,364
   Common stock
     $.001 par value; 20,000,000 shares authorized;
    6,891,979 shares issued and outstanding
     each share is entitled to one vote                                           6,892
   Additional paid-in capital                                                23,898,385
   Notes receivable from stockholders                                            (1,841)
   Accumulated deficit                                                      (20,949,936)
                                                                           ------------
        Total stockholders' equity                                         $  2,954,864
                                                                           ------------
        Total liabilities and stockholders' equity                         $  6,126,533
                                                                           ============
</TABLE>


See accompanying notes to financial statements





                                       19
<PAGE>   20



                        YIELDUP INTERNATIONAL CORPORATION

                            STATEMENTS OF OPERATIONS



<TABLE>
<CAPTION>
                                                                  YEARS ENDED DECEMBER 31,
                                                              ---------------------------------
                                                                 1998                  1997
                                                              ------------         ------------
<S>                                                           <C>                  <C>
Gross revenues                                                $  7,992,003         $  7,465,447
   Less provision for sales returns                             (1,259,429)                  --
                                                              ------------         ------------
Net revenues                                                     6,732,574            7,465,447

Cost of sales                                                    4,568,477            5,155,759
   Provision for excess inventory                                2,740,910              808,469
                                                              ------------         ------------
Total cost of sales                                              7,309,387            5,964,228

Gross margin (deficit)                                            (576,813)           1,501,219
                                                              ------------         ------------

Operating expenses:
   Research and development                                      2,749,925            2,021,790
   Selling, general, and administrative                          4,877,568            3,724,100
                                                              ------------         ------------
Total operating expenses                                         7,627,493            5,745,890
                                                              ------------         ------------
Operating loss                                                  (8,204,306)          (4,244,671)
   Investment write-off                                         (2,000,000)                  --
Interest income, net                                               173,346              251,029
                                                              ------------         ------------
Net loss                                                       (10,030,960)          (3,993,642)
   Accretion on redeemable convertible preferred stock          (1,330,962)                  --
                                                              ============         ============
Net loss applicable to holders of common stock                $(11,361,922)        $ (3,993,642)
                                                              ============         ============

Basic and diluted net loss per share
   applicable to holders of common stock                      $      (1.86)        $      (0.81)
                                                              ============         ============
Shares used in per share computations                            6,114,841            4,946,858
                                                              ============         ============
</TABLE>


                 See accompanying notes to financial statements






                                       20
<PAGE>   21



                        YIELDUP INTERNATIONAL CORPORATION
                       STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
                                          CLASS A                                                            SERIES A               
                                       COMMON STOCK                      COMMON STOCK                    PREFERRED STOCK            
                                  SHARES           AMOUNT           SHARES          AMOUNT            SHARES          AMOUNT        
                               ------------     ------------     ------------     ------------    ------------     ------------     
<S>                            <C>             <C>              <C>              <C>             <C>              <C>
Balances as of
December 31, 1996                 1,912,111     $      1,912        1,495,000     $      1,495              --     $         -- 

Exercise of Class A
   common stock options              46,861               47               --               --              --               -- 
Exercise of common
   stock options                         --               --           42,702               43              --               -- 
Exercise of Class A
   warrants                              --               --        2,257,690            2,257              --               -- 
Expense related to
   certain Class A warrants              --               --               --               --              --               -- 
Exercise of Class B
   warrants                              --               --            1,000                1              --               -- 
Conversion of Class A
   common stock to                 (545,319)            (545)         545,319              545              --               -- 
   common stock
Payment of notes                         --               --               --               --              --               -- 
   receivable
Net loss                                 --               --               --               --              --               -- 
                               ------------     ------------     ------------     ------------    ------------     ------------

Balances as of
December 31, 1997                 1,413,653     $      1,414        4,341,711     $      4,341              --     $         --
Exercise of Class A
   common stock options              10,000               10               --               --              --               -- 
Exercise of common
   stock options and warrants            --               --           20,524               21              --               -- 
Conversion of Class A
   common stock to                  (59,156)             (60)          59,156               60              --               -- 
   common stock
Issuance of warrants
   to lender                             --               --               --               --              --               -- 
Issuance of Series A
   preferred stock                       --               --               --               --             600                1
Conversion of Series A
   preferred stock to                    --               --               --               --
   common stock                                                     2,470,588            2,470            (134)              --    
Redemption of Series A
   preferred stock                       --               --               --               --            (466)              (1)
Accreation on redeemable
   preferred stock                       --               --               --               --              --               -- 
Net loss                                 --               --               --               --              --               -- 
                               ------------     ------------     ------------     ------------    ------------     ------------
Balances as of
December 31,1998                  1,364,497     $      1,364        6,891,979     $      6,892              --     $         --
                               ============     ============     ============     ============    ============     ============
</TABLE>

<TABLE>
<CAPTION>
                                                   NOTES                                        
                                ADDITIONAL      RECEIVABLE                            TOTAL    
                                 PAID-IN           FROM           ACCUMULATED      STOCKHOLDER 
                                 CAPITAL        STOCKHOLDERS        DEFICIT          EQUITY    
                               ------------     ------------     ------------     ------------ 
<S>                            <C>              <C>              <C>              <C>         
Balance as of
December 31, 1996              $  7,571,550     $    (15,348)    $ (5,594,372)    $  1,965,237

Exercise of Class A
   common stock options              86,173               --               --           86,220
Exercise of common
   stock options                    238,610               --               --          238,653
Exercise of Class A
   warrants                      14,477,951               --               --       14,480,208
Expense related to
   certain Class A warrants         300,000               --               --          300,000
Exercise of Class B
   warrants                          10,999               --               --           11,000
Conversion of Class A
   common stock to                       --               --               --               --
   common stock
Payment of notes                         --           13,507               --           13,507
   receivable
Net loss                                 --               --       (3,993,642)      (3,993,642)
                               ------------     ------------     ------------     ------------

Balances as of
December 31, 1997              $ 22,685,283     $     (1,841)    $ (9,588,014)    $ 13,101,183
Exercise of Class A
   common stock options               6,890               --               --            6,900
Exercise of common
   stock options and warrants        95,828               --               --           95,849
Conversion of Class A
   common stock to                       --               --               --               --
   common stock
Issuance of warrants
   to lender                         24,353               --               --           24,353
Issuance of Series A
   preferred stock                5,759,203               --               --        5,759,204
Conversion of Series A
   preferred stock to      
   common stock                      (2,470)              --               --              --
Redemption of Series A
   preferred stock               (6,001,664)              --               --       (6,001,665)
Accreation on redeemable
   preferred stock                1,330,962               --       (1,330,962)              --
Net loss                                 --               --      (10,030,960)     (10,030,960)
                               ------------     ------------     ------------     ------------
Balances as of
December 31,1998               $ 23,898,385     $     (1,841)    $(20,949,936)    $  2,954,864
                               ============     ============     ============     ============
</TABLE>


                 See accompanying notes to financial statements

                                       21
<PAGE>   22




                        YIELDUP INTERNATIONAL CORPORATION
                            STATEMENTS OF CASH FLOWS



<TABLE>
<CAPTION>
                                                                                     YEARS ENDED DECEMBER 31,
                                                                                  ------------------------------
                                                                                      1998             1997
                                                                                  ------------     ------------ 
<S>                                                                               <C>              <C>          
Cash flows from operating activities:
   Net loss                                                                       $(10,030,960)    $ (3,993,642)
   Adjustments to reconcile net loss to net cash used by operating activities:
                    Depreciation and amortization                                      574,174          293,322
                    Provision for bad debts                                          1,091,360          104,900
                    Provision for sales returns                                      1,259,429               --
                    Provision for excess inventory                                   2,740,910          808,469
                    Expenses related to certain Class A Warrants                            --          300,000
                    Write-off of investment                                          2,000,000               --
                    Changes in operating assets and liabilities:
                              Accounts receivable                                      572,558       (3,730,201)
                              Inventories                                             (850,347)      (4,809,686)
                              Prepaid expenses and other assets                        169,936         (917,140)
                              Accounts payable                                      (1,764,474)       1,869,115
                              Accrued liabilities                                      (76,702)         169,422
                              Customer deposits                                             --          (43,000)
                                                                                  ------------     ------------
                     Net cash used by operating activities                          (4,314,116)      (9,948,441)
                                                                                  ------------     ------------
Cash flows from investing activities:
   Purchase of plant and equipment                                                    (572,311)        (794,245)
   Proceeds from sales of short-term investments                                     1,496,150               --
   Decrease in restricted cash                                                              --          103,129
   Purchase of short-term investments, net                                                  --       (1,496,150)
   Purchase of other investments                                                            --       (1,000,000)
                                                                                  ------------     ------------
                     Net cash provided by (used by) investing activities               923,839       (3,187,266)
                                                                                  ------------     ------------
Cash flows from financing activities
   Proceeds from notes payable                                                         998,317          250,000
   Proceeds from note payable to a director of the Company                             500,000               --
   Payments under capital lease obligations                                            (47,635)         (57,268)
   Payments of term loan                                                              (330,000)        (360,000)
   Decrease in restricted cash on term loan                                            406,749               --
   Proceeds of notes receivable from stockholders                                           --           13,507
   Issuance of common stock from option exercises                                       95,849          238,653
   Issuance of common stock from warrant exercise                                           --       14,491,208
   Issuance of Series A preferred stock, net                                         5,759,204               --
   Redemption of Series A preferred stock                                           (6,001,664)              --
   Issuance of Class A common stock from option exercise                                 6,900           86,220
                                                                                  ------------     ------------
                     Net cash provided by financing activities                       1,387,720       14,662,320
                                                                                  ------------     ------------

Net increase (decrease) in cash and cash equivalents                                (2,002,557)       1,526,613

Cash and cash equivalents at beginning of year                                       2,145,785          619,172
                                                                                  ------------     ------------

Cash and cash equivalents at end of year                                          $    143,228     $  2,145,785
                                                                                  ============     ============
Non-cash financing and investing activity:
   Acquisition of equipment under capital lease obligations                       $     92,758     $         --
   Accretion on redeemable convertible preferred stock                               1,330,962               --
                                                                                  ============     ============
Cash paid for interest                                                            $     69,258     $     75,870
                                                                                  ============     ============
</TABLE>


                 See accompanying notes to financial statements






                                       22
<PAGE>   23

                        YIELDUP INTERNATIONAL CORPORATION

                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 1998 AND 1997



(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company

     We develop, manufacture, and market cleaning, rinsing and drying equipment
used in the manufacturing of semiconductor wafers and other defect sensitive
substrates.

Cash Equivalents

     Cash equivalents consist primarily of highly liquid debt instruments with
original maturity dates up to 90 days.

Short-Term Investments

     Short-term investments are classified as "available-for-sale" and are
stated at fair value. Any unrealized gains and losses are reported as a separate
component of stockholders' equity, but to date have not been significant. As of
December 31, 1998, short-term investment includes a certificate of deposit of
$10,000.

Concentration of Credit Risk

     Financial instruments that potentially subject us to significant
concentration of credit risk consist primarily of cash equivalents, short-term
investments and trade receivables. Substantially all of our cash equivalents are
invested in certificates of deposit and money market funds. We perform ongoing
credit evaluations of our customers and generally require no collateral. We
maintain reserves for potential credit losses. At December 31, 1998, the
allowance for potential credit losses was approximately $555,000.

Inventories

     Inventories are stated at the lower of first-in, first-out cost or market.
We periodically review our inventories for potential slow-moving and obsolete
items and write down impaired items to net realizable value.

Property and Equipment

     Property and equipment are stated at cost less accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated
useful lives of the related assets, generally three to five years. Property and
equipment recorded under capital leases and leasehold improvements are amortized
on a straight-line basis over the shorter of the lease terms or their estimated
useful lives.

     We review our long-lived assets and certain identifiable intangibles for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net undiscounted cash flows expected to be generated by the asset. If
such asset is considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the asset exceeds the
fair value of the asset. Assets to be disposed of are reported at the lower of
the carrying amount or fair value, less costs to sell.

Revenue Recognition

     Revenue is recognized after shipment when there is no significant
uncertainty regarding customer acceptance and payment. We have determined that
no significant uncertainties exist regarding customer acceptance and payment
when we have received signed evidence of an arrangement with the customer, our
product has been shipped and the collection of our receivable is probable. For





                                       23
<PAGE>   24

certain of our customers, we recognize revenue only on letter of credit or
receipt of cash. We have established a reserve for sales returns, which as of
December 31, 1998 was approximately $747,000


Product Warranty

     A provision for the estimated future costs of warranty repair is provided
at the time of sale.

Income Taxes

     Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in the statement of operations in the period
that includes the enactment date. A valuation allowance is recorded for deferred
tax assets if it is more likely than not that some portion or all of the
deferred tax assets will not be realized.

Stock Based Compensation

     We account for our stock based compensation plans using the intrinsic value
method. As such, compensation expense is recorded if on the measurement date, 
which is generally the date of grant, the current market price of the 
underlying stock exceeds the exercise price.

Fair Value of Financial Instruments

     The carrying amounts of our cash and cash equivalents, short-term
investments, accounts receivable, accounts payable, bank borrowings and notes 
payable approximate their respective fair values.

Use of Estimates

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

Net Loss Per Share

     Basic net loss per share is based on the weighted average number of shares
of Class A common stock and common stock outstanding. Diluted net loss per share
is based on the weighted average number of shares of Class A common stock and
common stock outstanding and dilutive common equivalent shares from stock
options and warrants outstanding using the treasury stock method. In 1998 and
1997, we had 946,768 options and 4,157,860 warrants and 658,806 options and
4,182,149 warrants outstanding, respectively, that were not included in the
computation of diluted EPS because to do so would have been antidilutive for
those years, however, such options and warrants could potentially dilute basic
EPS in the future.

Reclassifications

     Certain amounts in the 1997 financial statements have been reclassified to
conform with the 1998 financial statement presentation.

Comprehensive Income

     We have no other components of comprehensive income other than our reported
amounts of net loss applicable to holders of common stock.





                                       24
<PAGE>   25



(2) BASIS OF PRESENTATION AND LIQUIDITY

     We have suffered recurring losses from operations that raise substantial
doubt about our ability to continue as a going concern. Our ability to continue
as a going concern is dependent upon our obtaining additional financing from
other sources. The accompanying financial statements have been prepared assuming
we will continue as a going concern and do not include any adjustments that
might result from the outcome of this uncertainty.

     We currently anticipate that we will need to raise additional funds through
other public or private financing to adequately fund our operations through
December 31, 1999 and beyond before we reach profitability and positive cash
flow. On January 21, 1999, we entered into a definitive agreement with FSI
International, Inc. ("FSI"), for FSI to acquire all of the outstanding stock of
YieldUP. We also granted FSI a non-exclusive royalty-bearing license to our
patent portfolio. See Note 9.

(3) BALANCE SHEET COMPONENTS

Inventories

     A summary of inventories follows:

<TABLE>
<CAPTION>
                                          DECEMBER 31,
                                              1998
                                          -----------
<S>                                       <C>        
   Raw materials                          $ 1,840,088
   Work in process                            493,024
   Evaluation units                         1,308,052
   Finished goods                           2,486,053
                                          -----------
Gross inventory                           $ 6,127,217
   Less provision for excess inventory      3,339,180
                                          -----------
Net inventory                             $ 2,788,037
                                          ===========
</TABLE>


     Evaluation units are systems installed at potential customers' sites. These
units are stated at cost less accumulated depreciation. Depreciation is provided
using the straight-line method over the estimated useful lives of the units,
generally three years.

Property and Equipment

     A summary of property and equipment follows:


<TABLE>
<CAPTION>
                                                 DECEMBER 31,
                                                     1998
                                                  ----------
<S>                                               <C>       
Machinery and equipment                           $1,576,573
Furniture and fixtures                                71,817
Leasehold improvements                               857,360
                                                  ----------
                                                   2,505,750
Less accumulated depreciation and amortization     1,005,038
                                                  ----------
                                                  $1,500,712
                                                  ==========
</TABLE>


(4) INCOME TAXES

     We have a net operating loss carryforward at December 31, 1998 of
$13,282,000 for federal tax purposes and $6,675,000 for California state tax
purposes. The difference between the federal net operating loss and the
accumulated deficit is primarily attributed to the years ended December 31, 1993
and 1994 when we were an S-Corporation for taxation purposes. The difference
between the federal and California net operating loss carryforward is due to the
50% limitation of net operating loss carryforwards





                                       25
<PAGE>   26


for California tax purposes. The federal net operating loss carryforwards expire
in the years 2010 through 2018. The California net operating loss carryforwards
expire in the years 2000 through 2003.

     Federal and California tax laws impose significant restrictions on the
utilization of net operating loss carryforwards in the event of a change in the
ownership of YieldUP, which constitutes an "ownership change" as defined by
Internal Revenue Code Section 382. The IPO of YieldUP common stock in November
1995 resulted in such a change. As a result, $1,400,000 of the federal and
$699,000 of the California tax net operating loss carryforwards are subject to
an annual limitation approximating $525,000. Any unused annual limitations may
be carried forward to increase the limitations in subsequent years.

     The following reconciles the expected corporate federal income tax expense
(computed by multiplying our income before taxes by 34%) to our income tax
expense for the years ended December 31, 1998 and 1997:


<TABLE>
<CAPTION>
                                                           1998             1997
                                                        -----------     ----------- 
<S>                                                     <C>             <C>         
Expected income tax (benefit)                           $(3,411,000)    $(1,358,000)
Expenses not deductible for tax purposes                     21,000          71,000
State tax expense, net of Federal income tax benefit          1,000           1,000
Net operating loss not benefited                          3,389,000       1,286,000
                                                        -----------     -----------
            Actual income tax expense                   $        --     $        --
                                                        ===========     ===========
</TABLE>

     The tax effects of temporary differences that give rise to significant
portions of deferred tax assets as of December 31, 1998 and 1997 are as follows:


<TABLE>
<CAPTION>
                                                       1998            1997
                                                   -----------     -----------
<S>                                                <C>             <C>        
Deferred tax assets:
      Net operating loss carryforwards             $ 5,106,000     $ 2,710,000
      Reserves and accruals                          2,126,000         506,000
      Fixed assets                                     235,000         102,000
      Research credit carryover                        414,000              --
      Other                                             16,000          11,000
                                                   -----------     -----------
              Total gross deferred tax assets        7,897,000       3,329,000
Less valuation allowance                            (7,897,000)     (3,329,000)
                                                   -----------     -----------
                        Net deferred tax assets    $        --     $        --
                                                   ===========     ===========
</TABLE>

     The net change in the valuation allowance was an increase of $4,568,000 for
the year ended December 31, 1998 and an increase of $1,559,000 for the year
ended December 31, 1997.

     Gross deferred tax assets as of December 31, 1998 include approximately
$60,000 relating to the exercise of stock options, which will be credited to
equity when realized.





                                       26
<PAGE>   27



(5) DEBT

      Debt is comprised of two bank loans and a promissory note. The first bank
loan is a $2,000,000 revolving credit line collateralized by our qualifying
accounts receivable, which bears interest at the bank's prime rate (7.75% at
December 31, 1998) plus 1.25%. As of December 31, 1998, $840,000 was outstanding
under this loan, which matures on March 3, 1999. The second bank loan is a
capital equipment term loan, which bears interest at the same bank's prime rate
plus 1.75%. As of December 31, 1998, $408,316 was outstanding under this loan,
which matures on March 4, 2002. Principal payments on the term loan are due as
follows: $102,079 in 1999, $136,105 in 2000, $136,105 in 2001 and $34,027 in
2002. As of December 31, 1998, we were not in compliance with certain covenants
of the bank loan agreement. We obtained a waiver of such non-compliance from the
bank through January 31, 1999 and are currently in negotiation with the bank to
restructure covenants and terms of the loans.

     Warrants to purchase 2,439 shares of common stock were issued to the bank
during the year ended December 31, 1998 in conjunction with the loan agreements.
The fair value assigned to the warrants was calculated using the Black-Scholes
option pricing model. The portions of the proceeds allocated to the warrants
amounted to $24,353 for the year ended December 31, 1998, which has been
recorded as a discount on the debt and as an increase to additional paid-in
capital. The discount will be amortized as additional interest expense using the
effective interest method over the life of the loan.

     On December 14, 1998, we issued a promissory note in the principal amount
of $500,000 to Abhay Bhushan, a director and chief financial officer of YieldUP
at the interest rate of nine percent (9.0%) per annum, to enable the redemption
of the Series A Shares. The promissory note was repaid in full on January 29,
1999, including the $500,000 principal, and the $5,794.52 of interest incurred
from December 14, 1998 through January 29, 1999.

(6) COMMITMENTS AND CONTINGENCIES

Leases

     We are obligated under operating leases for certain equipment, our
facilities and capital leases for certain equipment, that expire at various
dates during the next five years. Included in property and equipment are
machinery and equipment recorded under capital leases as follows:


<TABLE>
<CAPTION>
                                                           DECEMBER 31,
                                                              1998
                                                          ------------
<S>                                                      <C>     
           Machinery and equipment .....................    $115,950
           Less accumulated amortization ...............      13,528
                                                            --------
                                                            $102,422
                                                            --------
</TABLE>

     Future minimum lease payments under our non-cancelable operating leases and
future minimum capital lease payments as of December 31, 1998, are as follows:

<TABLE>
<CAPTION>
   YEAR ENDING                                            CAPITAL       OPERATING
   DECEMBER 31,                                           LEASES         LEASES
   ------------                                          --------       ---------
<S>                                                      <C>            <C>     
       1999                                              $ 23,856       $254,388
       2000                                                23,856        224,328
       2001                                                23,856        127,841
       2002                                                23,856             --
       2003                                                 7,952             --
                                                         --------       ========
Total minimum lease payments                             $103,376       $606,557
                                                                        ========
       Less amount representing interest                   20,397
                                                         --------
Present value of minimum lease payments                  $ 82,979
       Less current portion                                15,994
                                                         ========
                                                         $ 66,985
                                                         ========
</TABLE>





                                       27
<PAGE>   28



Rent expense was approximately $204,252 for the year ended December 31, 1998 
and $149,751 for the year ended December 31, 1997.

Patent Matters

     CFM Technologies, Inc. and CFMT, Inc. (collectively "CFM") filed a
complaint against us in United States District Court for the District of
Delaware in September 1995. The complaint alleged that the drying process
incorporated in certain of our products infringes a patent held by CFM. On
October 14, 1997, a federal court for the District of Delaware ruled in our
favor. In a written opinion granting summary judgment for us, the United States
District Court held that CFM had failed to produce evidence on three separate
elements of the patent claim. To establish infringement, evidence of all three
elements was required. On June 30, 1998, the United States District Court of
Delaware granted CFM's petition for re-argument of the summary judgment motion,
and the re-argument briefs have been filed by both parties. The court may not
sustain our original order. If the original order is overturned, the litigation
may proceed to trial, and the litigation and the associated costs may, and an
unfavorable adjudication will, have a material adverse impact on us. A loss, if
any, resulting from an unfavorable adjudication, cannot presently be estimated.
Accordingly, no provision for any liability that may result upon adjudication
has been made in the financial statements.

     CFM filed an additional complaint against us in United States District
Court for the District of Delaware on December 30, 1998. The complaint alleged
that the cleaning process incorporated in certain of our products infringes
patents held by CFM. We believe that the additional CFM patent infringement
lawsuit is without merit and that none of our technology and products infringe
any of the CFM patents asserted in that litigation. Our technology is
substantially different from CFM's patented technology. We plan to vigorously
defend our intellectual property against any and all claims. The litigation and
the associated costs may, and an unfavorable adjudication will, have a material
adverse impact on us. A loss, if any, resulting from an unfavorable
adjudication, cannot presently be estimated. Accordingly, no provision for any
liability that may result upon adjudication has been made in the financial
statements.

(7) STOCKHOLDERS' EQUITY

Common stock And Class A common stock

     The terms of the common stock and the Class A common stock are essentially
identical, except that: (i) the holders of the common stock are entitled to one
vote per share and holders of Class A common stock are entitled to five votes
per share, (ii) if stock dividends, splits, distributions, reverse splits,
combinations, reclassification of shares, or other recapitalizations
(collectively, "recapitalizations") are declared or effected, such
recapitalizations shall be effected in a like manner with respect to the common
stock and the Class A common stock, except that payments in shares of capital
stock shall be paid in common stock with respect to common stock and Class A
common stock with respect to Class A common stock, and (iii) shares of Class A
common stock are convertible into common stock on a share-for-share basis at the
option of the holder at any time and all remaining shares of Class A common
stock will automatically be converted to common stock at such time as there are
fewer than 400,000 shares of Class A common stock outstanding.

     In addition, the shares of Class A common stock are automatically converted
into shares of common stock upon their transfer to any person other than the
permitted transferees which are mainly the stockholders' family members.

Preferred Stock

     The preferred stock may be issued in series, and shares of each series will
have such rights and preferences as are fixed by the Board of Directors in the
resolutions authorizing the issuance of that particular series.





                                       28
<PAGE>   29

     On March 30, 1998, we completed a $6 million equity financing in a private
placement of Series A Convertible Preferred Stock (Series A Shares). Under the
securities purchase agreement, we issued 600 Series A Shares. After the
satisfaction of certain holding periods, each of the newly issued Series A
Shares were convertible, at the option of the holder, into shares of common
stock based upon a conversion price of $10.8625 per share or if lower, 100% of
the market price, defined as the lowest closing bid price during the 20 trading
days preceding a conversion. The convertible preferred stock carried a dividend
of 5% per year, payable in kind. Upon certain events, such as mergers or other
business combinations, delisting of our common stock from the Nasdaq SmallCap
Market and any breaches of representation, warranty or covenants of the
agreement, the Series A stockholders had the option to redeem their Series A
Shares for cash at 120% of face value. Consequently, we recorded an accretion on
redeemable preferred stock of $1,330,962 in 1998. We issued 2,470,588 shares of
common stock upon the conversion of 134 Series A Shares into common stock, in
accordance with the terms of the agreement with the Series A stockholders. On
December 21, 1998, we redeemed all of the remaining 466 outstanding Series A
Shares for a cash payment of approximately $6 million.


Warrants

     As of December 31, 1998, all of our Class A Warrants had been exercised or
redeemed except 1,780 Class A warrants outstanding which can be redeemed by the
holders at a price of $0.05 per warrant. We incurred a non-cash expense of 
$300,000 in the first quarter of 1997 related to an amendment to certain of our 
Class A Warrants to resolve a potential dispute with holders of such warrants. 
The terms of certain Class A warrants were amended to give certain Class A 
warrant holders an additional 0.2 shares of common stock for each Class A 
warrant exercised. We used the Black-Scholes option pricing model to value the 
Class A warrants before and after the change in terms and determined that the 
increase in value was approximately $300,000.

     In September 1995, 450,000 Class B warrants were issued on a pro-rata basis
to all holders of our stock and stock options. This action was accounted for as
a recapitalization. In November 1995, 1,495,000 Class B warrants were issued as
part of our IPO which offered Units, each of which comprised one share of common
stock, a Class A warrant and a Class B warrant. Upon the conversion of the Class
A warrants, in April 1997, the Class A warrant holders were given 1,495,000
Class B warrants in accordance with the terms of the Class A warrant. These
Class B warrants were valued at their fair values at the time of their issuances
and these amounts are included in common stock in stockholders' equity.

     As of December 31, 1998, we had issued and outstanding 4,155,421 Class B
warrants. The holder of each Class B warrant is entitled, upon payment of the
exercise price of $11.00, to purchase one share of common stock. Unless
previously redeemed, the Class B warrants are exercisable at any time until
November 21, 2000. The Class B warrants are subject to redemption by us, at a
price of $0.05 per warrant, if the average closing bid price of the common stock
exceeds certain prices within certain time periods. As of December 31, 1998, 
1,000 Class B warrants have been exercised and no Class B warrants have been 
redeemed.

     On March 4, 1998, we granted 2,439 five-year warrants to a commercial
lender to purchase common stock at an exercise price of $10.25 per share.


Stock Option Plans

     As of December 31, 1998, we have three stock-based compensation plans,
which are described below.

     The Board of Directors has reserved 1,050,000 shares of common stock for
issuance under our 1995 Stock Option Plan (the "Option Plan"). Options may be
granted to employees (including officers), consultants, advisers and directors,
although only employees and directors and officers, who are also employees, may
receive "incentive stock options" intended to qualify for certain tax treatment.
The exercise price of non-qualified stock options must equal at least 85% of the
fair market value of the common stock on the date of grant, and the exercise
price of incentive stock options must be no less than the fair market value on
the date of grant. Options granted under the Option Plan vest over 4 years and
must be exercised within 10 years. As of December 31, 1998, 671,026 options are
outstanding under the Option Plan.

     Prior to the adoption of the Option Plan in September 1995, we granted
346,411 options to purchase shares of Class A common stock at prices ranging
from $0.69 to $3.17 per share under a separate option plan (the "Prior Plan").
We do not anticipate granting any additional options to purchase Class A common
stock under the Prior Plan, and any shares subject to options under the Prior
Plan that terminate, or are canceled, will not be issued or used for new
options. As of December 31, 1998, 190,742 options are outstanding under the
Prior Plan.






                                       29
<PAGE>   30


     On September 29, 1998, the Board of Directors adopted a stock option
repricing program to restore the incentive for employees to remain with YieldUP,
for eligible employees. Executive officers and directors of YieldUP were not
eligible for the stock option repricing program. Under the program, the
employees could opt for participation in the program by agreeing to a nine-month
exercise restriction in return for exchanging old options for newly priced
options on October 14, 1998. Under this program 439,800 options were repriced at
an exercise price of $0.63, the closing price of our common stock on the NASDAQ
SmallCap Market on October 14, 1998.

     Under our 1995 Outside Directors Stock Option Plan (the "Directors Plan"),
200,000 shares of common stock have been reserved for issuance. The Directors
Plan provides for the automatic granting of non-qualified stock options to
directors of YieldUP who are not employees of YieldUP ("Outside Directors").
Under the Directors Plan, each new Outside Director elected will automatically
be granted at the date of his or her election an option to purchase 20,000
shares of common stock. Additionally, each Outside Director, except for Outside
Directors who have received an initial grant of an option to purchase 20,000
shares within six months of the annual meeting of stockholders, will
automatically be granted on the date of each annual meeting of stockholders an
option to purchase 5,000 shares of common stock. The exercise price of the
options in all cases will be equal to the fair market value of the common stock
on the date of grant. Options granted under the Directors Plan vest over 4 years
and, generally, must be exercised within 10 years. As of December 31, 1998,
85,000 options are outstanding under the Director's Plan.

     A summary of the status of our three fixed stock option plans as of
December 31, 1998 and 1997, and changes during the years ended on those dates is
presented below:

<TABLE>
<CAPTION>
                                                     NUMBER OF       WEIGHTED AVERAGE
                                                      SHARES          EXERCISE PRICES
                                                     ---------       ----------------
<S>                                                 <C>              <C>      
       Balance as of December 31, 1996 .........       610,287          $    3.63
         Granted ...............................       344,750          $   10.04
         Exercised .............................       (89,563)         $    3.63
         Canceled ..............................      (206,668)         $    6.10
                                                     ---------          ---------
       Balance as of December 31, 1997 .........       658,806          $    6.21
         Granted ...............................     1,037,600          $    3.51
         Exercised .............................       (25,375)         $    4.05
         Canceled ..............................      (724,263)         $    9.04
                                                     ---------          ---------
       Balance as of December 31, 1998 .........       946,768          $    1.15
                                                     =========          =========
</TABLE>

     As of December 31, 1998, 502,492 shares were available for grant. The
number of options exercisable were 355,241 as of December 31, 1998, and 237,374
as of December 31, 1997.

     We use the intrinsic value method in accounting for our plans. Accordingly,
no compensation cost has been recognized for any of the plans. Had compensation
cost for our three stock-based compensation plans been determined consistent
with SFAS No. 123, our net loss and net loss per share would have been increased
to the pro forma amounts indicated below:


<TABLE>
<CAPTION>
                                         1998              1997
                                     ------------     ------------ 
<S>                                  <C>              <C>          
   Net loss as reported .........    $(11,361,922)    $ (3,993,642)
     Pro forma ..................    $ 12,785,596     $ (4,738,585)
   Net loss per share as reported    $      (1.86)    $      (0.81)
     Pro forma ..................    $      (2.09)    $      (0.96)
</TABLE>

     The effects of applying SFAS 123 in this proforma disclosure is not
indicative of the effects on reported results for future years. SFAS 123 does
not apply to awards prior to 1995, and additional awards in future years are
anticipated. Stock options granted to consultants and advisors are accounted for
using the fair value method under SFAS 123.

     The weighted-average fair value of options granted was $2.89 in 1998 and
$6.79 in 1997.

     The fair value of each option grant is estimated on the date of grant using
the Black Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1998 and 1997: no dividend yield; expected
volatility of 104% in 1998 and 67.5% in 1997; risk free interest rates of 4.53%
in 1998 and 6% in 1997; expected lives of four years for the Prior Plan and five
years for the other two plans.

     The following table summarizes information about fixed stock options
outstanding as of December 31, 1998:


                                       30
<PAGE>   31




<TABLE>
<CAPTION>
                                        OPTIONS OUTSTANDING                                  OPTIONS EXERCISABLE
                              ------------------------------------------------           ----------------------------
                               NUMBER     WEIGHTED AVERAGE        WEIGHTED               NUMBER           WEIGHTED
    RANGE OF                     OF          REMAINING            AVERAGE                 OF               AVERAGE
 EXERCISE PRICES               SHARES     CONTRACTUAL LIFE      EXERCISE PRICE           SHARES         EXERCISE PRICE
                              -------     ----------------      --------------           -------        --------------
<S>                          <C>         <C>                     <C>                    <C>              <C>
$ 0.63 -- $ 0.63 ..........   657,800           9.12               $ 0.6300              132,893           $ 0.6300
$ 0.69 -- $ 0.69 ..........    64,771           6.41               $ 0.6900               58,465           $ 0.6900
$ 0.76 -- $ 0.76 ..........   125,971           6.32               $ 0.7600              125,971           $ 0.7600
$ 1.63 -- $ 5.00 ..........    65,000           7.98               $ 3.8669               30,416           $ 5.0000
$ 5.88 -- $ 5.88 ..........    11,000           8.01               $ 5.8800                5,270           $ 5.8800
$ 7.50 -- $ 7.50 ..........    10,000           7.41               $ 7.5000                   -- 
$ 8.00 -- $ 8.00 ..........       437           8.19               $ 8,0000                  437           $ 8.0000
$ 9.75 -- $ 9.75 ..........     1,123           9.19               $ 9.7500                1,123           $ 9.7500
$11.75 -- $11.75 ..........    10,000           8.41               $11.7500                   --                 --
$13.00 -- $13.00 ..........       666           8.58               $13.0000                  666           $13.0000
                              -------           ----               --------              -------           --------
$ 0.63 -- $13.00 ..........   946,768           8.44               $ 1.1476              355,241           $ 1.1991
                              =======                                                    =======     
</TABLE>


(8) MAJOR CUSTOMERS AND GEOGRAPHIC INFORMATION

     We have adopted the provisions of statement of financial accounting
standards No. 131 "Disclosures about Segments of an Enterprise and Related
Information." We operate in one segment and accordingly have provided only the
required enterprise wide disclosures. For the year ended December 31, 1998,
sales to one customer exceeded 10% of gross revenues. Sales to Applied Materials
as a percent of gross revenues were 11.8% for the year ended December 31, 1998,
and 19.8% for the year ended December 31, 1997.

     Export sales to our international customers outside North America,
primarily to Japan and Europe comprised approximately 33% of gross revenues (20%
in Europe and 13% in the Asia Pacific region) for the year ended December 31,
1998, and 32% of gross revenues (11% in Europe and 21% in the Asia Pacific
region) for the year ended December 31, 1997.

(9) SUBSEQUENT EVENTS

     On January 21, 1999, we entered into a definitive agreement with FSI, for
FSI to acquire all of the outstanding stock of YieldUP. The form of the
transaction is anticipated to be a merger ("the Merger"). Under the terms of the
definitive agreement, the YieldUP stockholders will receive $0.7313 in cash and
0.1567 of a share of FSI common stock for each share of YieldUP common stock.
YieldUP option holders will receive substitute options entitling them to
purchase FSI common stock. When the Merger becomes effective, the definitive
agreement provides that each outstanding warrant to purchase shares of our
common stock under any warrant agreement will become a right to acquire FSI
common stock. Per the definitive agreement, the warrants will be subject to
substantially the same terms and conditions as they were prior to the Merger.
Each warrant, upon payment of the exercise price, will entitle the holder to
receive $.7313 cash and .1567 of a share of FSI common stock for each share of
YieldUP common stock the warrant holder is entitled to. Completion of the
transaction is subject to certain closing conditions including, among other
things, approval by the stockholders of YieldUP. As part of the definitive
agreement to be acquired by FSI, we also granted FSI a non-exclusive
royalty-bearing license to our patent portfolio.





                                       31
<PAGE>   32



ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

     None


PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS;
        COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

     The following sets forth certain information regarding our executive
officers:

DIRECTORS AND EXECUTIVE OFFICERS

     The directors and executive officers of YieldUP and their ages as of
January 31, 1999 are as follows:


<TABLE>
<CAPTION>
                 NAME                          AGE                   POSITION
                 ----                          ---                   --------
<S>                                           <C>       <C>
            Raj Mohindra ..............        54        President, Chief Executive Officer and Director
            Abhay K. Bhushan ..........        54        Executive Vice President, Chief Financial Officer and Director
            Suraj Puri ................        54        Vice President, Chief Technical Officer and Director
            Ram Paul Gupta(1) .........        60        Director
            Daniel Flamm(1) ...........        55        Director
</TABLE>

----------

(1)   Members of the Compensation and Audit Committees.

     Mr. Mohindra co-founded YieldUP in 1993 and has served as President, Chief
Executive Officer and a director of YieldUP since its inception. Prior to
joining YieldUP, from 1968 to 1993, he worked for IBM where he held a number of
operational, management and technical positions, including head of the IBM
Productivity Competence Center, Manager of Systems Engineering and Senior
Technical Staff Member.

     Mr. Bhushan co-founded YieldUP in 1993 and has served as Executive Vice
President and Chief Financial Officer since June 1997, and as a director of
YieldUP since its inception. He also served as Chief Financial Officer of
YieldUP from August 1993 until July 1995. From 1996 to 1997, Mr. Bhushan was
co-founder of Portola Communication, a software company, where he served as
Chairman, President, Chief Financial Officer and Vice President Business
Development. From 1974 to 1996, Mr. Bhushan was employed by Xerox Corporation,
where he served in various capacities, including Manager of the Xerox
Environmental Leadership Programs, Manager of Systems Engineering and Standards
and Manager of Business Strategy.

     Mr. Puri co-founded YieldUP in 1993 and has served as Vice President, Chief
Technical Officer and a director of YieldUP since its inception. Prior to
joining YieldUP, from 1986 to 1993, Mr. Puri served as an independent consultant
in the semiconductor industry.

     Mr. Gupta has served as a director of YieldUP since July 1995. From 1992 to
the present, Mr. Gupta has served as President, Chief Executive Officer, Chief
Operating Officer and Vice President of Operations of Quality Semiconductor,
Inc., a semiconductor manufacturer. From 1988 to 1992, Mr. Gupta served as
President of Blackship Computers, Inc., a systems integration company.

     Dr. Flamm has served as a director of YieldUP since September 1998. From
1995 to the present, Dr. Flamm has served as President of Microtechnology
Analysis Group. From 1988 to 1998, Dr. Flamm was the McKay lecturer at
University of California, Berkeley, in the Department of Electrical Engineering
and Computer Science. From 1977 to 1989, Dr. Flamm was a distinguished member of
technical staff at AT&T Bell Laboratories.





                                       32
<PAGE>   33



     The Board of Directors is divided into three classes. Each class of
directors consists of one or two directors, who serve staggered three year
terms.

     Officers are elected by and serve at the discretion of the Board of
Directors. There are no family relationships among the directors or officers of
YieldUP.

COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934

     Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires our directors and executive officers, and persons who
own more than ten percent of a registered class of our equity securities, to
file with the SEC initial reports of ownership and reports of changes in
ownership of common stock and other equity securities of YieldUP. Officers,
directors and greater than ten percent beneficial owners are required by SEC
regulation to furnish YieldUP with copies of all reports they file under Section
16(a).

     To our knowledge, based solely on our review of the copies of such reports
furnished to YieldUP and written representation that no other reports were
required, all Section 16(a) filing requirements applicable to our officers,
directors and greater than ten-percent beneficial owners were complied with
during the year ended December 31, 1998.

ITEM 10. EXECUTIVE COMPENSATION

     The following table sets forth the aggregate base salary and bonuses paid
by YieldUP for services rendered during 1996, 1997, and 1998 to our chief
executive officer and the other executive officers (the "Named Executive
Officers") who earned more than $100,000 in any of these years.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                                                                       LONG-TERM
                                                                                ANNUAL                                COMPENSATION
                                                                             COMPENSATION                            -------------
                                                                   ------------------------------------------          SECURITIES
                                                                                                  ALL OTHER            UNDERLYING
               NAME AND PRINCIPAL POSITION                         YEAR         SALARY           COMPENSATION            OPTIONS
               ---------------------------                         ----        --------          ------------         ------------
<S>                                                               <C>         <C>                <C>                 <C>
               Raj Mohindra ...............................        1996        $138,459            $5,400(1)               --
                 President and Chief Executive Officer ....        1997        $159,045            $7,200(1)               --
                                                                   1998        $149,317            $7,200(1)


               Abhay Bhushan ..............................        1997        $ 67,721            $4,200(1)           60,000
               Executive Vice President and Chief Financial        1998        $118,657            $7,200(1)          (60,000)(3)
                 Officer (2)

               Suraj Puri .................................        1997        $ 98,242            $4,200(1)               --
                 Vice President and Chief Technical Officer        1998        $ 99,524            $7,200(1)           90,000
</TABLE>

----------

(1)  Represents automobile allowance payments.
(2)  Mr. Bhushan became an employee of YieldUP in June 1997.
(3)  Mr. Bhushan surrendered on November 12, 1998, the 60,000 options granted to
     him in June 1997.

STOCK OPTION INFORMATION

     The following table contains information concerning stock option grants to
the Named Executive Officers during the year ended December 31, 1998.


OPTIONS/SAR GRANTS IN LAST FISCAL YEAR


<TABLE>
<CAPTION>
                                                          PERCENTAGE OF
                                                          TOTAL OPTIONS
                                      NUMBER OF             GRANTED TO
                                      SECURITIES             EMPLOYEES
                                      UNDERLYING             IN FISCAL        EXERCISE OR BASE      EXPIRATION
               NAME                 OPTIONS GRANTED            YEAR             PRICE($/SH)           DATE
               ----                 ---------------       -------------       ----------------      ----------
<S>                                <C>                   <C>                 <C>                   <C>
               Suraj Puri               90,000                 8.9%              $   0.63            11/11/07
</TABLE>





                                       33
<PAGE>   34



AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES

     The following table sets forth, for the Named Executive Officers, the
shares acquired and the value realized on exercise of stock options during the
year ended December 31, 1998 and the year-end number and value of exercisable
and unexercisable options.


<TABLE>
<CAPTION>
                                                                           NUMBER OF                                               
                                                                      SECURITIES UNDERLYING              VALUE OF UNEXERCISE       
                                                                      UNEXERCISED OPTIONS AT            IN-THE-MONEY OPTIONS AT    
                                      SHARES                             DECEMBER 31, 1998               DECEMBER 31, 1998(1)      
                                   ACQUIRED ON       VALUE         ------------------------------    ----------------------------- 
               NAME                 EXERCISE       REALIZED        EXERCISABLE      UNEXERCISABLE    EXERCISABLE     UNEXERCISABLE
               ----                -----------     --------        -----------      -------------    -----------     -------------
<S>                               <C>             <C>             <C>              <C>              <C>             <C>
               Raj Mohindra             --            --             125,971            --            $124,711            --
               Suraj Puri ..            --            --              90,000            --            $100,800            --
               Abhay Bhushan            --            --              14,479            --            $ 15,348            --
</TABLE>


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

(1)   The value of "in-the-money" stock options represents the positive spread
      between the exercise price of stock options, which was $0.76 per share for
      Mr. Mohindra, $0.63 for Mr. Puri, and $0.69 for Mr. Bhushan, and the fair
      market value for our common stock of $1.75 per share as of December 31,
      1998, which was the closing price of our common stock on December 31,
      1998.

     We do not have employment agreements with any of our executive officers or
directors.

COMPENSATION OF DIRECTORS

     From time to time, directors have received grants of options to purchase
our common stock. Directors who are not employees of YieldUP receive yearly
grants of options to purchase common stock under the Directors Plan. YieldUP
pays nominal amounts to outside members of the Board of Directors for meeting
participation and special assignments.





                                       34
<PAGE>   35




ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

                             PRINCIPAL STOCKHOLDERS

     The following table sets forth certain information regarding the beneficial
ownership of our capital stock as of December 31, 1998, (i) by each person who
is known by us to own beneficially more than 5% of our capital stock, (ii) by
each of the Named Executive Officers and by each of our directors, and (iii) by
all officers and directors as a group.


<TABLE>
<CAPTION>
                                                                                                                        PERCENTAGE
                                                                                                  NUMBER OF            OF SHARES OF
                                                   NUMBER OF SHARES                            SHARES OF CLASS           CLASS A
                   NAME AND ADDRESS OF                OF COMMON              PERCENTAGE           A COMMON                COMMON
                   BENEFICIAL OWNER(1)                 STOCK(2)              OF CLASS(3)          STOCK(2)                STOCK(3)
               ---------------------------         ----------------          -----------      ----------------         ------------
<S>                                               <C>                       <C>              <C>                       <C>
               Raj Mohindra ..............             10,000                      *             980,257(4)                65.8%
               Abhay Bhushan .............            147,537(5)                 2.1%            262,070(6)                19.0%
               Suraj Puri ................            210,000(7)                 3.0%            184,783(8)                13.5%
               Ram Paul Gupta ............             35,000(9)                   *              12,646(10)                  *
               Daniel L. Flamm ...........             20,000(11)                  *                  --                     --
               All directors and executive
                 officers as a group (five
                 (5) persons) ............            422,537(12)                5.9%            1,439756(13)              94.9%
</TABLE>


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

*    Represents less than one percent.

(1)  All beneficial owners listed may be reached at 117 Easy Street, Mountain
     View, California 94043.

(2)  Except pursuant to applicable community property laws or as otherwise
     noted, all shares are beneficially owned and sole voting, and investment
     power is held by the persons named.

(3)  Based on 1,364,497 shares of Class A common stock and 6,891,979 shares of
     common stock outstanding as of December 31, 1998, plus shares which may be
     acquired by the named person(s) upon exercise of outstanding options
     exercisable within 60 days of March 1, 1999. Each share of Class A common
     stock has five votes, and each share of common stock has one vote.

(4)  Includes 125,971 shares of Class A common stock issuable upon exercise of
     options exercisable within 60 days of March 1, 1999. Also includes 44,161
     shares held by family members of Mr. Mohindra, but Mr. Mohindra disclaims
     beneficial ownership of all such shares except to the extent of any
     pecuniary interest therein which he may have.

(5)  Includes 30,000 shares of common stock issuable upon exercise of options
     exercisable within 60 days of March 1, 1999.

(6)  Includes 14,479 shares of Class A common stock issuable upon exercise of
     options exercisable within 60 days of March 1, 1999. Also includes 43,434
     shares of Class A common stock held by family members of Mr. Bhushan, but
     Mr. Bhushan disclaims beneficial ownership of all such shares except to the
     extent of any pecuniary interest therein which he may have.

(7)  Includes 190,000 shares of common stock issuable upon exercise of options
     exercisable within 60 days of March 1, 1999.

(8)  Includes 7,239 shares of Class A common stock held by a family member of
     Mr. Puri, but Mr. Puri disclaims beneficial ownership of all such shares
     except to the extent of any pecuniary interest therein which he may have.

(9)  Includes 35,000 shares of common stock issuable upon exercise of options
     exercisable within 60 days of March 1, 1999.

(10) Includes 12,646 shares of Class A common stock issuable upon exercise of
     options exercisable within 60 days of March 1, 1999.

(11) Includes 20,000 shares of common stock issuable upon exercise of options
     exercisable within 60 days of March 1, 1999.

(12) Includes 175,000 shares of common stock issuable upon exercise of options
     exercisable within 60 days of March 1, 1999.





                                       35
<PAGE>   36




(13) Includes 1,191,826 shares of Class A common stock issuable upon exercise of
     options exercisable within 60 days of March 1, 1999.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     During the last two fiscal years, we had the following transactions with
certain of our officers, directors and holders of 5% of the outstanding shares
of YieldUP, as described below.

     On December 14, 1998, we issued a promissory note in the principal amount
of $500,000 to Abhay Bhushan, a director and chief financial officer of YieldUP,
bearing interest at the rate of nine percent (9.0%) per annum. The promissory
note was repaid in full on January 29, 1999.

     We believe that all transactions with affiliates described above were made
on terms no less favorable to us than could have been obtained from unaffiliated
third parties.

PART IV

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K

     (a)  Exhibits: See the index of exhibits on pages 37 of this report

     (b)  Financial statements

     (c)  Reports on Form 8-K:

          Current Reports on Form 8-K filed on January 27, 1999


                                       36
<PAGE>   37

SIGNATURES

     In accordance with Section 13 or 15(d) of the Exchange Act, we have caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

                                       YIELDUP INTERNATIONAL CORPORATION
                                                  (COMPANY)


                                             /s/ RAJ MOHINDRA
                                -----------------------------------------------
                                Raj Mohindra, Chairman and Chief Executive
                                (Principal Executive Officer)

Date:  March 12, 1999

<TABLE>
<CAPTION>
             NAME                                                   TITLE                                      DATE
             ----                                                   -----                                      ----
<S>                                               <C>                                                    <C>    
      /s/ RAJ MOHINDRA                            Chairman, Chief Executive Officer, and Director         March 12, 1999
------------------------------------
        Raj Mohindra

      ABHAY K. BHUSHAN*                           Chief Financial Officer, and Director                   March 12, 1999
------------------------------------
      Abhay K. Bhushan

(PRINCIPAL ACCOUNTING AND FINANCIAL OFFICER)

      DANIEL L. FLAMM*                            Director                                                March 12, 1999
------------------------------------
      Daniel L. Flamm

      RAM PAUL GUPTA*                             Director                                                March 12, 1999
------------------------------------
      Ram Paul Gupta

       SURAJ PURI*                                Director                                                March 12, 1999
------------------------------------
       Suraj Puri

*by:     /s/  RAJ MOHINDRA                      
    --------------------------------
    Raj Mohindra, Attorney-in-Fact
</TABLE>


                                       37
<PAGE>   38
                       YIELDUP INTERNATIONAL CORPORATION

                               INDEX OF EXHIBITS


<TABLE>
<CAPTION>
           EXHIBIT
            NUMBER                                           DESCRIPTION OF EXHIBIT
           -------                                           ----------------------
<S>                     <C>
            3.2*        Certificate of Incorporation.
            3.3**       Bylaws.
            4.1*        Form of Warrant Agreement between YieldUP and the Warrant Agent, including the form of warrants.
            10.1*       Form of Indemnity Agreement.
            10.2*       1995 Stock Option Plan and forms of agreement thereunder.
            10.3*       1995 Outside Directors Stock Option Plan and forms of agreement thereunder.
            10.5*       Facilities lease between YieldUP and Lori A. Halligan Trust, dated September 11, 1995.
            10.7*       Loan and Security Agreement with Silicon Valley Bank dated September 16, 1996.
            10.8        The Merger Agreement by and between YieldUP and FSI International, Inc., dated as of January 21, 1999.
            10.9        License Agreement for Microelectronic Technology between YieldUP (Licensor) and FSI International, Inc.
                       (Licensee), dated as of January 21, 1999. Confidential treatment requested and granted.
            23.1        Consent of Independent Auditors.
            27.1        Financial Data Schedule
</TABLE>


----------

*    The exhibit is incorporated by reference to Form SB-2 (Registration No.
     33-97792-LA)

**   The exhibit is incorporated by reference to YieldUP's Form 10-KSB for
     the fiscal year ended December 31, 1997.




                                       38