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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
 
                             WASHINGTON, D.C. 20549
 
                            ------------------------
 
                                   FORM 10-K
 
                ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                      THE SECURITIES EXCHANGE ACT OF 1934
 
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<S>                                    <C>
      FOR THE FISCAL YEAR ENDED               COMMISSION FILE NUMBER
         SEPTEMBER 30, 1998                           0-22248
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                            ------------------------
 
                       GASONICS INTERNATIONAL CORPORATION
               (EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
 
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<S>                                    <C>
              DELAWARE                              94-2159729
   (State or other jurisdiction of               (I.R.S. Employer
   incorporation or organization)               Identification No.)
</TABLE>
 
                              2730 JUNCTION AVENUE
                           SAN JOSE, CALIFORNIA 95134
                                 (408) 570-7000
 
    (Address, including ZIP code, and telephone number, including area code,
                  of Registrant's principal executive offices)
 
          Securities registered pursuant to Section 12(b) of the Act:
                                      NONE
 
          Securities registered pursuant to Section 12(g) of the Act:
                                  COMMON STOCK
 
                            ------------------------
 
    Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ___
 
    Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K or any amendment to this
Form 10-K. [  ]
 
    The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based on the closing price of the Common Stock on December 14, 1998,
as reported on The Nasdaq National Market was approximately $49,967,203 Shares
of Common Stock held by each officer and director and by each person who owns 5%
or more of the outstanding Common Stock have been excluded from this computation
in that such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.
 
    As of December 14, 1998, the Registrant had outstanding 14,177,648 shares of
Common Stock.
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
1.  Portions of the Registrant's Proxy Statement for the Annual Meeting of
    Stockholders to be held on March 4, 1999 are incorporated by reference into
    Part III of this Report on Form 10-K.
 
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                                     PART I
 
ITEM 1. BUSINESS
 
THE COMPANY
 
    GaSonics International Corporation ("GaSonics" or the "Company") is a
leading global supplier of products and services for the dry photoresist and
residue removal segments of advanced integrated circuit ("IC") manufacturing.
The Company's products consist of photoresist removal systems, residue removal
systems, isotropic etch systems, and high pressure furnaces for the
semiconductor industry and low pressure chemical vapor deposition ("LPCVD")
systems for the flat panel display ("FPD") industry. The photoresist removal,
residual removal and isotropic etch systems use proprietary downstream plasma
processing technology designed to increase yields in the manufacture of advanced
ICs. The Company markets and sells its products to many leading IC manufacturers
worldwide including Intel, Motorola, IBM, Samsung, Siemens, Lucent Technologies,
ST Microelectronics and United Microelectronics.
 
    The Company began operations in 1968, was incorporated in California in
March 1971 and reincorporated in Delaware in March 1994. In February 1991, the
Company acquired Branson International Plasma Corporation, a manufacturer of
photoresist removal equipment. In August 1995, the Company acquired Tekisco,
Ltd. of Tokyo, Japan, a manufacturer of LPCVD equipment for the manufacture of
FPDs.
 
    The Company's principal executive offices are located at 2730 Junction
Avenue, San Jose, California 95134. The Company's telephone number is (408)
570-7000 and worldwide website address is http://www.gasonics.com.
 
INDUSTRY BACKGROUND
 
    Over the past decade, rapid growth in the worldwide market for advanced ICs
and IC-related products has increased the demand for semiconductor manufacturing
equipment. In the highly sophisticated IC fabrication process, the Company's
products influence a large number of complex and repetitive processing steps,
including deposition, photolithography and etch. Deposition involves the
creation of a layer of either electrically insulating or electrically conductive
material on the surface of a wafer. The photolithography process then imprints
device features, using a photomask on a light sensitive polymer (photoresist).
After the photoresist is developed, an etch process selectively removes the
deposited material from the portions of the wafer surface not covered by the
imprinted pattern. Prior to processing additional layers on the wafer, the
photoresist and post-etch residues from the previous layer must be carefully
removed in order to create a clean and functional foundation for deposition of
the next layer. These processes between etch and deposition, often referred to
as "photoresist removal" or "ashing" and "post residue removal", have become
increasingly difficult as device geometries have shrunk to less than 1/700th the
size of a human hair.
 
    Today's advanced IC devices incorporate dozens of layers and use a variety
of materials in fabrication. After each layer, the resist and residue removal
process is repeated; as chips increase in capability, numbers of layers and
residue removal steps increase correspondingly. For example, a typical one
megabit Dynamic Random Access Memory chip ("DRAM") requires 11 masking and
subsequent photoresist removal steps. By comparison, a 64 megabit DRAM requires
20 to 25 masking and photoresist removal steps. As line geometries, or feature
sizes, of an IC continue to decrease to below 0.25 microns, wafer cleanliness
becomes increasingly important yet more difficult. New materials such as copper,
low K dielectrics (low dielectric constant materials) and deep ultraviolet
photolithography ("DUV") resists, will complicate photoresist removal and
preparation of the wafer surface for subsequent masking steps. As a result of
these trends, the Company believes that the number and complexity of photoresist
and residue removal systems per production line of advanced ICs will increase
along with the need for application-specific processes.
 
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    In the 1970's, photoresist was usually removed by immersing ICs into large
liquid chemical baths ("wet chemistry processing"). In the early 1980's, dry
chemistry processing used gases to remove the photoresist and began to replace
wet chemistry processing for those advanced processing steps that wet chemistry
processing was unable to complete or added too many defects (particles). Dry
chemical processing has grown as an alternative with potentially significant
cost of ownership savings as compared with wet chemical processing, especially
for complex ICs with feature sizes of 1.0 micron and below. Wet chemical
processing also poses environmental concerns associated with chemical storage,
handling, disposal and operator safety. In the fabrication of advanced ICs, wet
chemical processing for photoresist removal is now typically used only for
noncritical cleaning steps after the application of a dry process. In
traditional dry chemical plasma processing, plasma is created and the wafer is
exposed to the plasma in a single chamber in order to remove the residual
photoresist. However, because certain plasma elements can damage the wafer,
direct exposure can result in reduced yield.
 
THE GASONICS SOLUTION
 
    Addressing the photoresist removal needs of advanced IC manufacturers,
GaSonics pioneered in 1986 an advanced dry chemical process technology known as
"downstream microwave plasma." This technology separates the area for plasma
creation from that in which the wafer is exposed, thus shielding the wafer from
potential plasma damage while facilitating the chemical reaction. From there,
the Company has evolved a complex mix of product and technology to meet the
challenges of decreased line geometries, increased wafer sizes, new materials
and a series of difficult-to-remove residues. Called Integrated Clean: Solutions
between Etch and Deposition, these advanced photoresist and residue removal
technologies are believed by GaSonics to be critical for the manufacture of
advanced ICs at acceptable yields and costs. Yield, operating costs, throughput,
reliability, uptime and system cost are key components of an IC manufacturer's
total cost of ownership. The Company believes that downstream microwave
processing and Integrated Clean can impact each of these factors, offering
advanced IC manufacturers a simplified process solution with cost of ownership
benefits. Furthermore, GaSonics' platform technology combines a high degree of
reliability, serviceability, and overall equipment effectiveness to offer
additional cost of ownership benefits.
 
THE GASONICS STRATEGY
 
    In order to maintain its leadership position in advanced dry chemical
processing equipment for photoresist and residue removal, GaSonics business
strategy is designed to:
 
    ENHANCE STRATEGIC CUSTOMER RELATIONSHIPS.  The Company believes that its
long-standing relationships with many leading worldwide IC manufacturers such as
Intel, Motorola, Samsung, and Siemens are critical to ensure its position as a
leading supplier of photoresist removal equipment for semiconductor fabrication.
The Company intends to continue to focus its resources on its key customers in
order to develop future process equipment and to lower the customers' total cost
of ownership for photoresist removal equipment. As part of this focus, the
Company believes that providing dedicated personnel at key customer facilities
enables relationships, assists in the design of new fabrication process
equipment, and positions GaSonics as a principal supplier of volume equipment
orders.
 
    FOCUS ON CAPITAL PRODUCTIVITY.  By increasing yields in the manufacture of
advanced ICs, the Company believes its proprietary downstream microwave
processing technology offers customers cost of ownership advantages over wet
chemical processing and traditional dry chemical processing. For example,
consumable chemicals used in wet chemical processing of larger diameter wafers
increase the cost of ownership. Additionally, the Company believes that its
downstream technology offers better yields than traditional dry chemical
processes through reduced damage and contamination. The Company believes these
advantages position it as a preferred provider of lower cost of ownership
solutions, and the Company intends to introduce additional cost-effective
products and product enhancements, including a new platform for 300mm wafers
which further enhances capital productivity.
 
                                       3
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    CAPITALIZE ON ADVANCED WAFER FABRICATION TRENDS.  The Company's products
address the worldwide market opportunity for advanced photoresist removal
equipment created by wafer fabs manufacturing eight-inch wafers with near 0.25
micron line geometries. The Company believes that the yield benefits from dry
chemical processes in general and GaSonics' downstream processing technology, in
particular, increase significantly at line geometries of 0.25 micron and below.
GaSonics was one of the first companies to target the advanced photoresist
removal market by transitioning from traditional batch processing to a single
wafer processing and it currently has an installed base of over 700 systems in
the eight-inch market. The Company also currently intends to develop products
for the 300 millimeter marketplace as it emerges.
 
    PENETRATE ASIA/PACIFIC MARKET.  The Asia/Pacific market for IC processing
equipment represents more than one-half of the worldwide market. The Company has
been successful with large customers in Korea, Singapore, Taiwan and Japan, and
intends to continue to invest significant resources to further penetrate the
Asia/Pacific market, particularly Japan. Japanese process equipment
manufacturers have typically dominated that market with traditional dry chemical
systems that process multiple wafers in a single batch. Since advanced IC
manufacturers who use larger diameter wafers are increasingly adopting single
wafer processing, the Company believes its single wafer systems, which
incorporate advanced dry chemical processing techniques, may be well-positioned
to compete in Japan.
 
    TARGET NEW SYSTEMS AND APPLICATIONS.  The Company believes that its strong
customer relationships and technology leadership will enable it to develop new
systems and target applications for specific customer needs. The Company's
Performance Enhancement Platform ("PEP") system, illustrates that strategy. PEP
systems are dual chamber systems designed to increase throughput and optimize
clean room space. The system is designed to allow a mix-and-match option
allowing photoresist removal, residue removal or a combination of both process
chambers on one platform. In addition, PEP's advanced, flexible operating system
with graphical user interface allows for easy addition of new chamber and system
features to continuously improve the product's process capability. This
flexibility enables the PEP to span multiple generations of device manufacturing
needs and to support a growing portfolio of process capabilities. For 300mm
wafers, the Company has devised a unique platform that further increases capital
productivity over the dual chamber PEP. It uses the concept of segmenting
processes into multiple yet parallel steps, minimizing wafer handling overhead.
It is also being designed to meet customers' advanced resist and residue removal
needs below 0.18 micron.
 
GASONICS TECHNOLOGY
 
  MICROWAVE DOWNSTREAM PROCESSING
 
    GaSonics' proprietary microwave downstream processing technology for dry
chemical processing has been a key element in establishing product demand.
 
    In addition to separating the plasma source from the wafer exposure area
("downstream"), the Company's processing technology incorporates microwave
plasma generation. The Company believes that microwave frequency introduced for
semiconductor manufacturing by GaSonics in 1986, has become the preferred source
for plasma creation because it produces a higher concentration of neutral
species and fewer damaging ions than the alternative, radio frequency ("RF")
plasma. Thus, the Company believes its products have higher removal rates with
less damage and can operate at lower temperatures than competitive products that
utilize RF energy.
 
    GaSonics' proprietary microwave downstream processing technology can be
applied to other process applications, such as isotropic etch. In isotropic
etching, plasma selectively removes material such as silicon dioxide, silicon
nitride and polysilicon to create three-dimensional contours on the wafer. To
accommodate the increased number of mask layers, certain silicon layers on the
wafer must be carefully shaped prior to the deposition of the next layer of
material. These etching processes are typically completed by costly wet chemical
process steps. The Company believes that IC manufacturers will soon replace wet
chemical processes or high cost etching steps with more cost-effective
downstream dry chemical processes. The
 
                                       4
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Company believes that its proprietary downstream technology will enable
manufacturers to complete these steps with increased yield and lower cost.
 
    To meet the challenges of a marketplace increasing in complexity, GaSonics
has broadened its offerings of solutions which remove unwanted materials between
the etch process and subsequent deposition. The Company's twenty-five years of
experience and its technology leadership in photoresist removal have facilitated
its development of Integrated Clean. The critical process steps between etch and
deposition, specifically those that involve the removal of unwanted materials,
prepare the wafer surface for a better device connection. These materials, which
may be organic, inorganic, metallic or particulate in nature, can impact device
performance, reliability and yield if they are not removed. GaSonics core
business enables this critical process sequence, which includes photoresist
removal and residue removal. These steps complete the preceding etch step and
prepare the wafer for the subsequent deposition.
 
  HIGH PRESSURE THERMAL PROCESSING
 
    The Company introduced the concept of applying high pressure to IC thermal
processing with the introduction of its high-pressure furnace product. In IC
fabrication, there are a number of process steps that involve the exposure of
the wafer to high temperature for an extended period of time. Extended exposure
to high temperature can cause damage or yield loss. The combination of time and
temperature is known as the "thermal budget" of a device. The introduction of
high pressure into the process allows the process designer to reduce the process
temperature, reduce the processing time or reduce both, thus reducing the
thermal budget and damage or yield loss.
 
    The reduction of thermal budget in the fabrication of advanced integrated
circuits is becoming increasingly important as feature sizes continue to
decrease. The Company believes that high pressure thermal processing provides
important benefits to the advanced integrated circuit manufacturer because of
its ability to process wafers at increased rates while at lower temperatures
resulting in reduced die yield loss.
 
    A new key application of high pressure that will effect all of the advanced
device industry is in the manufacture of gate dielectrics of 0.25 micron and
less. As device speeds increase, the gate dielectrics must get thinner. At 0.25
micron, current silicon dioxide gate dielectric technology is no longer
acceptable. The Company has demonstrated a solution with the successful
fabrication of sub 0.25 micron devices using high-pressure nitrided gate
dielectric technology. This provides the Company with a key enabling high-
pressure technology for future device generations.
 
PRODUCTS
 
    The Company's major product line consists of advanced dry chemical
processing equipment for photoresist removal. The Company also offers advanced
dry chemical processing equipment for post-etch residue removal and isotropic
etching, as well as high pressure furnace systems and low-pressure chemical
vapor deposition equipment used for flat panel display manufacturing. In
addition, the Company provides upgrades, maintenance and spare parts for both
current and previous generation products.
 
  DRY CHEMICAL PROCESSING SYSTEMS
 
    PHOTORESIST REMOVAL.  The Company's dry chemical downstream processing
systems are designed to provide advanced IC manufacturers with lower cost of
ownership solutions for photoresist removal. This product line is currently
comprised of the Aura 1000, the Aura 2000-LL, the Aura 3010, the L3510, the
PEP/Ash and the PEP/Clean. All of these products incorporate the Company's
proprietary microwave downstream processing technology and are designed for
these products to be used in the fabrication of ICs with feature sizes of 0.25
microns and below. The throughput rates range from approximately 45 to 80 wafers
per hour for single chamber systems and up to 140 wafers per hour for dual
chamber systems,
 
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depending upon wafer size and customer application. System purchase prices range
from approximately $150,000 to $850,000.
 
    The Company introduced its high productivity platform, the PEP, in late
1995. A dual chamber platform with a proprietary wafer handler and high yield
photoresist removal capability, the PEP delivers a lower cost per wafer pass
while providing yield advantage with GaSonics' downstream microwave processing.
GaSonics introduced photoresist removal chambers for the PEP platform in 1995,
and the residue removal chambers were introduced in 1996. In 1997 the Company
introduced the PEP 3010 which transferred the chamber technology from the
successful Aura 3010 to the PEP platform. In 1998 the chamber technology from
the AE2000LL was transferred to the PEP as the PEP 3600 chamber. This chamber is
targeted at wafer residue removal applications that required high concentrations
of Flourine gas. The PEP 3600 chamber included a greatly improved microwave
source which improved both the process results on the wafer and source
reliability resulting in improved tool cost of ownership. A new universal
chamber is being developed that can accommodate multiple plasma sources that
address additional processing needs. The PEP represents the Company's migration
to a platform strategy, which offers flexibility and customization of single
wafer processing on an integrated platform. In 1994, the Company introduced two
single chamber product enhancements, the L3510, an enhancement to the L3500, and
the Aura 3010, an enhancement to the Aura 3000, each of which has extended
performance capabilities, including higher reliability, increased operational
flexibility and higher throughput.
 
    Sales of dry chemistry processing equipment for photoresist removal and post
etch residue removal accounted for approximately 62%, 69% and 62% of the
Company's net sales in fiscal years 1996, 1997 and 1998, respectively.
 
    POST ETCH RESIDUE REMOVAL.  Post etch residue removal is the process after
etch and after photo resist removal. This process removes unwanted materials
from the surface of the wafer.
 
    The PEP/Ash has proven effective at removing some of these residues with the
addition of low concentrations of Fluorine gases. In addition, a modular clean
chamber configured on the PEP becomes a PEP/Clean tool. This chamber is
specifically designed to accommodate large concentrations of Fluorine gas which
is sometimes needed for removing more difficult residues which form after metal
and oxide etch. The clean chamber has been qualified for production at several
fabs for this process. It has also shown capability for post oxide etch residue
removal.
 
    ISOTROPIC ETCHING.  Isotropic etching removes materials from a wafer both
horizontally and vertically at uniform rates. With isotropic etching, advanced
IC manufacturers can consistently and uniformly remove materials in a more
controlled environment, generally resulting in a lower cost than traditional wet
chemical processing. In fiscal 1998, the Company developed a module for the PEP
platform that addresses isotropic etch requirements including the removal of
silicon dioxide, silicon nitride and polysilicon from the top surface of wafers.
This PEP module incorporates the Company's downstream microwave technology.
 
  HIGH PRESSURE FURNACE SYSTEMS
 
    The Company pioneered the high-pressure furnace technology in 1977 with the
HiPox which sold over 150 systems to more than 30 semiconductor manufacturers
worldwide. In fiscal 1995, the Company introduced its second generation
high-pressure furnace, the VHP. The VHP system is intended to satisfy the
traditional HiPox customers' needs while providing a state of the art tool
needed to meet the more stringent thermal budget requirements of advanced IC
manufacturers. The first such application is in high-speed communication devices
utilizing silicon germanium (SiGe). The Company has established itself in this
business with repeat orders for the VHP in fiscal 1998 from a leading supplier
of these devices. With the establishment of VHP utility in the SiGe business,
the recent successes in ultra thin gate materials and the promise shown in
several other areas under development, the Company sees growth potential for the
use of high pressure technology in future generations of semiconductor devices.
Sales of VHP systems
 
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accounted for approximately 10% of the Company's net sales in fiscal 1998 and
less than 10% in both fiscal 1997 and 1996.
 
  LOW-PRESSURE CHEMICAL VAPOR DEPOSITION SYSTEMS
 
    In August 1995, the Company acquired its liquid crystal display ("LCD")
division in Japan (formerly called Tekisco, Ltd.), one of Japan's leading
manufacturers of low-pressure chemical vapor deposition systems used for flat
panel display manufacturing. Established in 1990, LCD began shipments of its
proprietary LPCVD systems for polysilicon-on-glass applications for flat panel
displays in 1991. LPCVD systems have been sold to a number of leading Japanese
and Korean flat panel display manufacturers. The Company believes that the
acquisition of LCD has expanded its market presence in Japan. The Company
believes that the equipment needs of flat panel or liquid crystal manufacturers
and semiconductor manufacturers are similar and appear to be converging as the
wafers used in IC manufacturing continue to increase in size.
 
  SPARE PARTS, SERVICE AND SUPPORT
 
    GaSonics also provides a series of products, including spare parts,
retrofits and upgrade kits as well as service, training and support for its
growing installed base. Revenue from these sources accounted for approximately
24%, 20% and 21% of the Company's net sales in fiscal 1998, 1997 and 1996,
respectively. As both the industries' technology and the Company's systems have
become more complex, the Company believes that its customers will increasingly
rely on its expertise for service and support. Since the installed base of the
Company's equipment continues to increase, the Company believes that service and
support revenue will continue to account for a significant portion of its future
revenue.
 
CUSTOMERS
 
    The Company sells its products to leading IC manufacturers and flat panel
display manufacturers located throughout the United States, Europe and the
Asia/Pacific. In fiscal 1998, Intel and Motorola accounted for approximately 20%
and 11% of net sales, respectively. In fiscal 1997, Samsung and Promos
Technologies each accounted for approximately 11% of net sales and Intel
accounted for approximately 10% of net sales. Sales to Intel accounted for
approximately 11% of net sales in fiscal 1996. The Company expects that sales of
its products to large customers, particularly Intel, Motorola, Samsung, Siemens
and Lucent Technologies will continue to account for a high percentage of its
net sales in the foreseeable future. None of the Company's customers has entered
into a long-term agreement requiring it to purchase the Company's products.
Moreover, sales to certain of the Company's customers have decreased as those
customers have completed or delayed purchasing requirements for new or expanded
fabrication facilities. Although the composition of the group comprising the
Company's largest customers has varied from year to year, the loss of a
significant customer or any reduction in orders by any significant customer,
including reductions due to customer departures from traditional buying
patterns, market, economic or competitive conditions in the semiconductor
industry or in the industries that manufacture products utilizing integrated
circuits, could materially adversely affect the Company's business, financial
condition and results of operations.
 
SALES, SERVICE AND CUSTOMER SUPPORT
 
    The Company believes its sales, service, applications and customer support
organizations are critical to its success in establishing and maintaining
long-term customer relationships and provide the Company with a competitive
advantage in the process equipment market. These relationships are of paramount
importance in the semiconductor capital equipment market, as the Company
believes that once a semiconductor manufacturer has selected a particular
supplier's capital equipment for delivering a technology solution against
specific device processing needs, that the manufacturer will frequently attempt
to consolidate its other capital equipment requirements with the same supplier
for related process
 
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applications. The Company's sales, service and applications organizations
develop close working relationships with customers in order to identify their
current and future semiconductor equipment requirements and to assist customers
in overcoming their technology challenges as they move to fabricating
increasingly more complex devices. As a result, the Company believes it is well
positioned to successfully develop, market and service products that provide
advanced semiconductor manufacturers enabling technology solutions.
 
    The Company markets, sells and services its products domestically and
internationally primarily through its marketing and direct sales and customer
support organizations, including service, applications and logistics personnel.
The Company has subsidiaries in the U.K., Ireland, France, Israel, Korea and
Japan, and branch offices in Italy, Singapore and Taiwan and has staffed these
subsidiaries and branches with sales, service, technical support, applications
engineering and logistics personnel. The Company maintains two third party
representatives to sell and service its products in Germany and China. The
Company has five United States sales and service centers located in Austin,
Texas; Dallas, Texas; Mesa, Arizona; East Fishkill, New York and its corporate
headquarters in San Jose, California.
 
    The Company's field service and applications engineering personnel based
throughout the United States, Europe and Asia, directly support domestic and
international equipment installations, process development, training, spare
parts logistics, warranty service and post-warranty contract service. The
Company's field service engineers include dedicated site-specific engineers
contracted by certain customers, such as Intel, Motorola, Lucent Technologies,
Philips, and ST Microelectronics.
 
    The Company generally offers standard warranty terms for two years on parts
and labor on equipment sales. The Company also offers service contracts to its
customers for continued maintenance of systems that are not covered by warranty.
 
    In support of its numerous field support centers located throughout the
world, the Company also maintains a headquarters-based customer satisfaction
organization. This organization includes a customer response center (CRC),
advanced technical/product support, technical publications, product training,
global field resource planning and spare parts logistics and planning. The
customer satisfaction organization is coordinated by the on-site CRC which has
round the clock hot-line and on-call personnel and direct access to
manufacturing, engineering and other resources to meet urgent and routine
requests. The CRC, working in concert with the Company's field sales, service,
applications and customer support centers, links customers with the Company's
most advanced technical problem solving expertise with the overall goal of
providing quality products and services which meet or exceed customer's
expectations.
 
    To provide customers with rapid access to replacement service parts, the
Company has strategically placed inventory in sales and service centers,
customers' sites, and distribution hubs in locations with a significant
installed base. These satellite or mini-stock rooms are located in several
European and Asian countries and in the eastern, central and western regions of
the United States. In addition, the stock room at the Company's headquarters in
San Jose, California keeps buffer inventory to support offsite stock rooms in
case of unexpectedly high level demand from customers.
 
    The Company has increased and continues to increase its sales, service,
applications and customer support presence in Asia. The Company intends to
continue investing significant resources to further penetrate the Asian market.
The Company's goal is to develop knowledgeable local sales, service,
applications and customer support resources throughout the region to increase
communication between the Company and Asian semiconductor manufacturers, reduce
response times for sales and support inquiries, and co-develop next generation
processes.
 
    In August 1995, the Company acquired its LCD division in Japan from
Kishimoto Sangyo Co. Ltd. of Tokyo, Japan. The LCD division is a manufacturer of
LPCVD equipment used for the manufacture of flat panel displays ("FPD's"). FPDs
are important components of portable computing and telecommunications devices.
FPD or liquid crystal display manufacturing utilizes very similar processes to
IC processing.
 
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Approximately 90% of the advanced FPDs produced worldwide are manufactured in
Japan. This acquisition was intended to enable GaSonics to continue to penetrate
this market and to further establish the credibility of GaSonics as a supplier
in Japan.
 
    During fiscal 1998, the Company established a direct presence in Japan for
sales, maintenance and service of the Company's photoresist and residue removal
business to better serve its Japanese customers. As a result, the Company
terminated its relationship with Seki Technotron, which had served as the
Company's exclusive distributor since 1995, providing sales and field support in
Japan.
 
BACKLOG
 
    The Company schedules production of its systems based upon backlog, informal
customer commitments and general economic forecasts for its targeted markets.
Backlog includes only those customer orders for systems for which the Company
has accepted purchase order numbers and assigned shipment dates within twelve
months as well as orders for spare parts and service and support of systems. The
Company's backlog for its systems, spare parts and service and support was
approximately $9.2 million and $32.8 million as of September 30, 1998 and 1997,
respectively. The decrease is due primarily to the substantial and severe
worldwide semiconductor slowdown and is expected to adversely impact the
Company's sales and financial results in fiscal 1999. Historically, the
Company's backlog has fluctuated significantly primarily as a result of the
cyclical nature of construction and equipping of new IC fabrication facilities.
The equipment requirements of new fabrication facilities cannot be determined
with accuracy and, therefore, the Company's backlog at any certain date is not
necessarily indicative of future sales. In addition, the Company's backlog at
any particular date is not necessarily representative of actual sales for any
succeeding period. Orders are often received and shipped in the same quarter,
system delivery schedules can change and have changed, cancellations and
rescheduled system orders can occur and have occurred, all orders are subject to
cancellation, deferral or rescheduling by the customer with limited or no
penalties, and there are potential delays, and there have been delays, in system
shipments. The Company has in the past experienced, and will likely continue to
experience, cancellations, deferrals and rescheduling of product orders.
 
MANUFACTURING
 
    The Company's manufacturing strategy is to produce high quality,
cost-effective, and reliable systems and assemblies to support on-going and
growing requirements for more environmentally friendly semiconductor processing
equipment. In order to provide the best added value to the customers and to
preserve standards in performance, the Company is placing emphasis on in-house
system integration and test activities that require proprietary core technology
or specialized knowledge and is increasing outsourcing routine fabrication and
assembly to strategic suppliers. For example, the Company historically has
fabricated proprietary quartzware used in its product lines in house. During
fiscal 1998, this quartzware fabrication was subcontracted out to a supplier who
uses the same equipment and techniques on Company premises to preserve
continuity, quality and customer responsiveness. The performance of
subcontractors is monitored through a supply management program to ensure that
they comply with quality and on-time expectations.
 
    The Company's principal manufacturing activities include assembly and test
work and are conducted at the Company's facility in San Jose, California and in
Atsugi City, Japan for the LPCVD business. Assembly includes subassembly and
final assembly. Test includes module test and final system test. The system
products are integrated and tested in Class 100 to 1000 clean rooms to
customers' acceptance criteria prior to shipment. In addition, Class 10 clean
rooms simulating a fab environment are available to provide equipment
performance demos to customers.
 
    The Company is subject to a variety of governmental regulations relating to
the use, storage, discharge, handling, emission, generation, manufacture and
disposal of toxic or other hazardous substances
 
                                       9
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used to manufacture the Company's products. The Company has to apply for special
permits whenever new regulated materials are introduced to the premises and
comply with applicable ordinances for handling toxic and hazardous materials for
ongoing activities. The Company believes that it is currently in compliance in
all material respects with such regulations and that it has obtained all
necessary environmental permits to conduct its business. Nevertheless, the
failure to comply with current or future regulations could result in substantial
fines being imposed on the Company, suspension of production, alteration of its
manufacturing process or cessation of operations. Such regulations could require
the Company to acquire expensive remediation equipment or to incur substantial
expenses to comply with environmental regulations. Any failure by the Company to
control the use, disposal or storage of, or adequately restrict the discharge
of, hazardous or toxic substances could subject the Company to significant
liabilities. To ensure that manufacturing and engineering activities are
conducted with heightened awareness on safety and compliance to regulations
regarding the use of toxic or other hazardous substances, training programs are
conducted on a year round basis for existing and new employees.
 
    To measure and improve customer satisfaction with the Company's products and
service, metrics are developed and measured on a weekly or monthly basis, such
as response time, quality, installation discrepancies, on-time, backorders,
employee flexibility, and productivity.
 
RESEARCH AND DEVELOPMENT
 
    The markets for semiconductor manufacturing equipment, including the markets
that utilize the Company's equipment, are characterized by rapid technological
development and product innovation. The Company intends to continue to commit
substantial resources to research and development in both dry chemistry
processing, high pressure thermal processing and LPCVD for the flat panel
display market.
 
    In order to maintain its long-term relationships with existing customers,
the Company commits substantial resources to the continuous improvement of
existing products and developing new products and technology. Customers with
large installed bases increasingly require their suppliers to improve existing
products in order to avoid the long qualifying evaluations required with new
equipment, which can be costly and risky. The Company's research and development
for product improvement includes in-house validation tests of major hardware and
software changes as well as detailed process characterization in the Company's
clean rooms.
 
    Historically, the Company has devoted a significant portion of its financial
resources to research and development programs and expects to continue to
allocate significant resources to these efforts. For fiscal 1998, 1997 and 1996,
total research and development expenditures were approximately $20.5 million,
$17.4 million and $18.0 million, respectively, and represented approximately 20%
of the Company's net sales in fiscal 1998 and 14% of total net sales in fiscal
1997 and fiscal 1996.
 
COMPETITION
 
    The semiconductor capital equipment industry is intensely competitive. A
substantial investment is required by customers to install and integrate capital
equipment into a semiconductor production line. As a result, once a
semiconductor manufacturer has selected a particular supplier's capital
equipment, the manufacturer often relies for a significant period of time upon
that equipment for the specific production line application and frequently will
attempt to consolidate its other capital equipment requirements with the same
supplier. Accordingly, it is difficult for the Company to sell to a particular
customer for a significant period of time if that customer selects a
competitor's capital equipment. The Company currently has only one principal
product line and experiences intense competition worldwide from a number of
leading foreign and domestic manufacturers, including Canon, Applied Materials,
Inc., Eaton Corporation, Lam Research Corporation, Matrix Semiconductor Systems,
Inc., Mattson Technology, Inc., Plasma Systems and MC Electronics, some of which
have substantially greater installed bases and greater financial, marketing,
technical and other resources than the Company. One of the Company's
competitors,
 
                                       10
<PAGE>
Fusion, was acquired by Eaton Corporation, a very large corporation, further
enhancing resources of one of the Company's competitors. The Company believes
that the semiconductor equipment industry will continue to be subject to
increased consolidation which will increase the number of larger more powerful
companies in the industry sector in which the Company competes. Certain of the
Company's competitors have announced the introduction of, or have introduced or
acquired, competitive products that offer enhanced technologies and
improvements. For example, Applied Materials and Lam Research have modules on
their products which remove photoresist using dry chemistry processing and,
therefore, compete with the Company's products. The Company expects its
competitors to continue to develop, enhance or acquire competitive products that
may offer improved price or performance features. New product announcements,
introductions and enhancements by the Company's competitors could cause a
significant decline in sales or loss of market acceptance of the Company's
systems in addition to intense price competition or otherwise could make the
Company's systems or technology obsolete or noncompetitive. In addition, by
virtue of its reliance on sales of advanced dry chemistry processing equipment,
the Company could be at a disadvantage compared to certain competitors that
offer more diversified product lines. The Company also believes competition will
continue from current and new suppliers employing other technologies, such as
wet chemistry, traditional dry chemistry and other techniques, as such
competitors attempt to extend the capabilities of their existing products.
Increased competitive pressure has led and may continue to lead to reduced
demand and lower prices for the Company's products, thereby materially adversely
affecting the Company's business, financial condition and results of operations.
 
    The principal competitive elements in dry chemistry processing for
photoresist and residue removal and etching are technological innovation, total
cost of ownership of the systems, including yield, price, product performance
and throughput capability, quality, and reliability, and customer service and
support. Although the Company believes that it competes favorably in these
areas, competitive product introductions could cause a decline in sales or loss
of market acceptance of the Company's existing products. In addition, by virtue
of its reliance on sales of advanced dry chemistry processing equipment, the
Company could be at a disadvantage compared to certain competitors that offer
more diversified product lines.
 
    The Company believes that to remain competitive it will have to commit
significant financial resources to develop new product features and
enhancements, to introduce next generation photoresist and residue removal
products on a timely basis, and to maintain customer service and support centers
worldwide. In marketing its products, the Company will face competition from
suppliers employing new technologies in order to extend the capabilities of
competitive products beyond their current limits or increase their productivity.
In addition, increased competitive pressure could lead to intensified
price-based competition, resulting in lower prices and margins, which would
materially adversely affect the Company's business, financial condition and
operating results.
 
    In addition, Japanese IC process equipment manufacturers dominate the market
for certain types of integrated circuits which use the Company's systems.
Japanese manufacturers are well established in the Japanese process equipment
market, making it difficult for non-Japanese manufacturers to penetrate the
Japanese market. Furthermore, Japanese semiconductor manufacturers have extended
their influence outside of Japan by licensing products and process technologies
to non-Japanese semiconductor manufacturers. Such licenses could result in a
recommendation to use certain semiconductor capital equipment manufactured by
Japanese companies. The Company has not established itself as a major competitor
in the Japanese market and there can be no assurance that the Company will be
able to achieve significant sales to Japanese IC manufacturers or compete
successfully in the future.
 
    LCD's competitors in the LPCVD market include Japan-based companies and
Japan-based joint ventures such as Applied Komatsu, Koyo Lindbergh and ULVAC.
These competitors manufacture alternative technology systems and they could, at
any time, enter the Company's markets with improved technology or with systems
that are directly competitive with those of the Company's LCD division. Late in
fiscal 1995, the Company acquired its LCD division in Japan, but to date, this
has not enabled the Company to significantly penetrate the photoresist removal
market in Japan. As a relatively recent entrant, the Company is at a distinct
competitive disadvantage in the Japanese market compared to leading Japanese
suppliers, many of which have long-standing collaborative relationships with
Japanese semiconductor manufacturers.
 
                                       11
<PAGE>
INTELLECTUAL PROPERTY RIGHTS
 
    The Company holds United States patents, corresponding foreign patents and
patent applications covering various aspects of its products and processes. The
Company seeks patents when appropriate on inventions resulting from its ongoing
research and development and manufacturing activities. In addition, the Company
owns several trademarks including the Company's name "GaSonics" and others
applicable to certain of its products. Nevertheless, the Company relies
primarily on innovation, technological expertise and marketing abilities of its
employees rather than patent, trademark, copyright or other intellectual
property rights protection.
 
    Although the Company attempts to protect its intellectual property rights
through patents, copyrights, trade secrets and other measures, there can be no
assurance that the Company will be able to protect its technology adequately or
that competitors will not develop similar technology independently. There can be
no assurance that any of the Company's pending patent applications will be
issued or that foreign intellectual property laws will protect the Company's
intellectual property rights. Patents issued to the Company could be challenged,
invalidated or circumvented and the rights granted thereunder may not provide
competitive advantages to the Company. Furthermore, there can be no assurance
that others will not independently develop similar products, duplicate the
Company's products or, if patents are issued to the Company, design around the
patents issued to the Company.
 
    As is typical in the semiconductor industry, the Company occasionally
receives notices from third parties alleging infringement claims. Although there
currently are no pending material claims or lawsuits against the Company
regarding any possible infringement claims, there can be no assurance that
infringement claims by third parties or claims for indemnification by the
Company's customers resulting from infringement claims will not be asserted in
the future against the Company or that such assertions, if proven to be true,
will not materially adversely affect the Company's business, financial condition
and results of operations. If any such claims are asserted against the Company,
the Company may seek to obtain a license under the third party's intellectual
property rights if available on reasonable terms or at all. Any such license
would increase the Company's expenses and could cause a material adverse effect
on the Company's business, financial condition and results of operations. The
Company could decide, in the alternative, to resort to litigation to challenge
such claims or enforce its proprietary rights. Litigation, even if unsuccessful,
could be extremely expensive and time consuming and could materially adversely
affect the Company's business, financial condition and results of operations.
 
EMPLOYEES
 
    At September 30, 1998, the Company had approximately 396 full-time
employees. The Company believes its future success will depend in large part on
its ability to attract and retain highly skilled and motivated employees. None
of the employees of the Company is covered by a collective bargaining agreement.
The Company considers its relationships with its employees to be good.
 
ITEM 2. PROPERTIES
 
    During the fourth quarter of fiscal 1998, the Company consolidated
operations at its headquarters in San Jose, California from three to two
buildings in connection with the expiration of an existing lease. This
consolidation has not reduced the Company's manufacturing or customer service
and support capability. The Company now maintains its headquarters in San Jose,
California in two leased facilities, aggregating approximately 117,500 square
feet, which contain general administration and finance, marketing and sales,
customer service and support, manufacturing and research and development. These
two buildings have separate leases and both leases expire on December 31, 1999.
The lease on one of the buildings totaling approximately 27,000 square feet has
an option to renew for an additional five years. The Company is undecided as to
whether or not it will exercise this option.
 
                                       12
<PAGE>
    The Company also leases four sales and support offices in the United States
in Austin, Texas; Dallas, Texas; Mesa, Arizona; and East Fishkill, New York
under leases expiring within one to three years. Additionally, the Company
leases sales and support offices in Korea, Japan, Scotland, Singapore and Taiwan
and Israel. Lease terms vary from two to ten years.
 
    The Company also leases two facilities in Japan totaling approximately
34,000 square feet, which is dedicated to the Company's LCD division. One of the
facilities, totaling approximately 20,000 square feet, is used for
administration, marketing and sales, customer service and support, manufacturing
and research and development. The lease on this facility expires September 30,
2000. The other facility, totaling approximately 14,000 square feet, was
acquired in December 1995 to expand production capability. The lease on this
facility expires December 31, 1998 with an option to renew for an additional
three years. It is currently anticipated that the Company will exercise its
option to renew the lease on this facility.
 
    The Company believes that its existing facilities will adequately meet its
anticipated requirements for the next twelve months and that suitable additional
or substitute space will be available as needed.
 
ITEM 3. LEGAL PROCEEDINGS
 
    The Company is not a party to any material litigation.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
    No matters were submitted to a vote of security holders during the Company's
fiscal fourth quarter ended September 30, 1998.
 
EXECUTIVE OFFICERS OF THE REGISTRANT
 
    The executive officers of the Company as of September 30, 1998 are as
follows:
 
<TABLE>
<CAPTION>
          NAME               AGE                               POSITION
------------------------  ---------  ------------------------------------------------------------
<S>                       <C>        <C>
Asuri Raghavan               45      Chief Executive Officer, President and Director
Terry Gibson                 45      Vice President, Finance and Chief Financial Officer
Bill Alexander               42      Vice President, Worldwide Sales and Field Operations
</TABLE>
 
    ASURI RAGHAVAN joined the Company in April 1998 as Chief Executive Officer
and President. Mr. Raghavan was formerly employed by Kulicke and Soffa
Industries, Inc. ("Kulicke") from June 1980 to October 1985 and from November
1988 to March 1998 where he most recently served as President of the Equipment
Group. From 1993 to 1995 he served as Vice President of the wire bonding
business and from 1995 to 1997 served as Senior Vice President of Marketing.
From 1991 to 1993, Mr. Raghavan was Vice President of Strategic Development and
from 1988 to 1991 was Director of Marketing for the Equipment Group. From 1985
to 1988, Mr. Raghavan was employed by American Optical Corporation where he held
the position of Vice President of Research and Technology. From 1980 to 1985,
Mr. Raghavan held various engineering, marketing and product development
positions with Kulicke.
 
    TERRY GIBSON became the Company's Vice President, Finance and Chief
Financial Officer in May 1996. Before joining GaSonics, Mr. Gibson had been
employed by Lam Research Corporation since 1991 where he served as Vice
President, Corporate Controller. From 1990 to 1991, Mr. Gibson was the Corporate
Controller at Silicon Valley Group and from 1989 to 1990 served as Corporate
Controller of Flextronics, Inc. From 1983 to 1989, Mr. Gibson held various
financial management positions at National Semiconductor and prior to that began
his career with the independent public accounting firm of Deloitte, Haskins and
Sells.
 
    BILL ALEXANDER joined the Company as Vice President, Worldwide Sales and
Field Operations in August 1997. Prior to joining GaSonics, Mr. Alexander was
employed by Tencor Corporation (now KLA-
 
                                       13
<PAGE>
Tencor Corporation) from November 1996 to August 1997 where he served as Vice
President of Asia-Pacific Operations. From 1993 to 1996 he first served as
Director of Asia Operations and later as Vice President of International
Operations with Watkins-Johnson Company and from 1990 to 1993 held senior sales
and marketing positions at Lam Research Corporation. From 1981 to 1990, Mr.
Alexander held various management positions with Watkins-Johnson Company,
Innovus Corporation, VLSI Technology and FMC Corporation.
 
    The executive officers serve at the discretion of the Board of Directors,
until their successors are appointed. No family relationships exist among the
Company's executive officers.
 
                                       14
<PAGE>
                                    PART II
 
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
  MATTERS
 
    The Company has one class of stock outstanding, its common stock, which has
a par value of $.001 per share.
 
    The Company's common stock is traded on The Nasdaq National Market under the
symbol "GSNX". The following table sets forth the range of highest and lowest
closing sales prices for the periods indicated as reported by The Nasdaq
National Market. These prices do not include retail markups, markdowns, or
commissions.
 
<TABLE>
<CAPTION>
                                                                               HIGH        LOW
                                                                             ---------  ---------
<S>                                                                          <C>        <C>
FISCAL 1998
First Quarter..............................................................  $   22.81  $    8.75
Second Quarter.............................................................      14.88       9.75
Third Quarter..............................................................      12.63       6.94
Fourth Quarter.............................................................       8.13       3.44
 
FISCAL 1997
First Quarter..............................................................  $   12.63  $    6.88
Second Quarter.............................................................      19.62      10.25
Third Quarter..............................................................      15.63       8.13
Fourth Quarter.............................................................      23.06      12.63
</TABLE>
 
    The Company has not paid cash dividends on its common stock since inception,
and its Board of Directors presently plans to reinvest any Company earnings in
its business. Additionally, certain financial covenants set forth in the
Company's bank line of credit agreement limit the Company's ability to pay cash
dividends. On November 25, 1998, the Company had approximately 146 stockholders
of record and approximately 3,744 beneficial stockholders.
 
                                       15
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
 
<TABLE>
<CAPTION>
                                                                        YEARS ENDED SEPTEMBER 30,
                                                        ---------------------------------------------------------
                                                           1998        1997        1996        1995       1994
                                                        ----------  ----------  ----------  ----------  ---------
                                                                (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                                     <C>         <C>         <C>         <C>         <C>
OPERATIONS:
Net sales.............................................  $  100,430  $  121,256  $  127,043  $  102,047  $  66,590
Gross margin..........................................      41,304      53,964      62,626      57,930     37,865
Operating income (loss)...............................      (9,597)      2,780      12,370      19,942     14,450
Net income (loss)(1)(2)(3)............................      (5,713)      3,007       8,930      16,126      9,890
Net income (loss) per share--Basic(1)(2)(3)...........       (0.41)       0.22        0.67        1.26       0.88
Net income (loss) per share--Diluted(1)(2)(3).........  $    (0.41) $     0.21  $     0.65  $     1.23  $    0.88
 
BALANCE SHEET:
Cash, cash equivalents and marketable securities......  $   32,338  $   24,884  $   25,909  $   36,599  $  21,230
Working capital.......................................      59,735      62,971      59,224      55,130     32,129
Total assets..........................................      97,216     104,382      96,430      85,367     43,682
Stockholders' equity..................................  $   75,408  $   79,193  $   72,689  $   63,188  $  33,370
</TABLE>
 
<TABLE>
<CAPTION>
                                                                                   QUARTERLY 1998
                                                                    ---------------------------------------------
                                                                       1ST         2ND         3RD         4TH
                                                                    ----------  ----------  ----------  ---------
                                                                                      UNAUDITED
                                                                        (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                                 <C>         <C>         <C>         <C>
Net sales.........................................................  $   32,851  $   27,616  $   23,595  $  16,368
Gross margin......................................................      15,436      12,688       7,169      6,011
Operating income (loss)...........................................       2,878         130      (6,711)    (5,895)
Net income (loss)(1)..............................................       2,009         228      (4,202)    (3,748)
Net income (loss) per share--Basic(1).............................        0.14        0.02       (0.30)     (0.26)
Net income (loss) per share--Diluted(1)...........................  $     0.14  $     0.02  $    (0.30) $   (0.26)
</TABLE>
 
<TABLE>
<CAPTION>
                                                                                   QUARTERLY 1997
                                                                    ---------------------------------------------
                                                                       1ST         2ND         3RD         4TH
                                                                    ----------  ----------  ----------  ---------
                                                                                      UNAUDITED
                                                                        (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                                 <C>         <C>         <C>         <C>
Net sales.........................................................  $   29,686  $   29,592  $   30,126  $  31,852
Gross margin......................................................      12,662      13,187      13,574     14,541
Operating income (loss)...........................................       1,374       1,735      (2,574)     2,245
Net income (loss)(2)(3)...........................................         929       1,281        (764)     1,561
Net income (loss) per share--Basic(2)(3)..........................        0.07        0.09       (0.06)      0.11
Net income (loss) per share--Diluted(2)(3)........................  $     0.07  $     0.09  $    (0.06) $    0.11
</TABLE>
 
------------------------
 
1.  Net loss for the third quarter ended June 30, 1998 and fourth quarter and
    year ended September 30, 1998 includes after tax charges of approximately
    $644,000 or $0.05 per share, $482,000 or $0.03 per share and $1.1 million or
    $0.08 per share, respectively, for costs related to reductions in force
    completed in June and September 1998.
 
2.  Net loss for the third quarter ended June 30, 1997 and net income for the
    year ended September 30, 1997 includes a $2.9 million or $0.20 per share
    after tax write-off of an uncollectible account receivable due from a
    customer in Thailand (See Note 2 of Notes to the Consolidated Financial
    Statements).
 
3.  Net income for the third quarter and fiscal year ended September 30, 1997
    and fiscal year ended 1996 includes a non-operating after tax gain of
    approximately $790,000 and $93,000 or $0.05 and $0.01 per
 
                                       16
<PAGE>
    share, respectively, realized from the sale of stock from a third party (see
    Note 8 of Notes to the Consolidated Financial Statements).
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
  OF OPERATIONS.
 
    With the exception of historical facts, the following Management's
Discussion and Analysis of Financial Condition and Results of Operations may be
deemed to contain forward-looking statements within the meaning of Section 21E
of the Securities Exchange Act of 1934, as amended, including, but not limited
to, future sales, gross margins, product development, operating expense levels,
and the sufficiency of financial resources to support future operations, and are
subject to the Safe Harbor provisions created by that statute. Such statements
are based on current expectations that involve inherent risks and uncertainties,
including those discussed below and under the heading "Additional Risk Factors"
that could cause actual results to differ materially from those expressed.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak as of the date hereof. The Company undertakes no
obligation to publicly release the results of any revisions to any
forward-looking statements, which may be made to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.
 
OVERVIEW
 
    The Company is a leading developer and supplier of a portfolio of products
and services used in the fabrication of advanced integrated circuits ("ICs") and
flat panel displays ("FPDs"). The Company's products consist of photoresist
removal systems, residual removal systems, isotropic etch systems and high-
pressure furnaces for the semiconductor industry and low-pressure chemical vapor
deposition systems ("LPCVD") for the flat panel display industry. In addition,
the Company provides spare parts and upgrades, as well as maintenance and
support services
 
    The Company's operating results have fluctuated significantly in the past
and will continue to fluctuate significantly in the future. The Company
anticipates that factors continuing to affect its future operating results will
include the cyclicality of the semiconductor industry and the markets served by
the Company's customers including the current prolonged and severe downturn in
the worldwide semiconductor industry, the timing of significant orders, patterns
of capital spending by customers, the proportion of international sales to net
sales, changes in pricing by the Company, its competitors, customers or
suppliers, market acceptance of new and enhanced versions of the Company's
products, the mix of products sold, financial systems, procedures and controls,
credit terms, discounts, the timing of new product announcements and releases by
the Company or its competitors, delays, cancellations or rescheduling of orders
due to customer financial difficulties or otherwise, the Company's ability to
produce systems in volume and meet customer requirements, the ability of any
customer to finance its purchases of the Company's equipment, changes in
overhead absorption levels due to changes in the number of systems manufactured,
political and economic instability and lengthy sales cycles. The Company's gross
margins have varied and will continue to vary materially based on a variety of
factors including the mix and average selling prices of systems sales, the mix
of revenues, including service and support revenues, overhead absorption levels,
utilization of field service and support resources, and costs associated with
new product introductions and enhancements and the customization of systems.
Furthermore, announcements by the Company or its competitors of new products and
technologies could cause customers to defer purchases of the Company's existing
systems, which would also materially adversely affect the Company's business,
financial condition and results of operations. Gross margin as a percentage of
sales in fiscal 1998 has decreased from fiscal 1997 and fiscal 1997 gross margin
as a percentage of sales has decreased from fiscal 1996 principally due to an
increased under absorption of manufacturing overhead and under utilization of
the field service and support infrastructure resulting from lower revenues due
to the current prolonged and severe worldwide semiconductor business slowdown
and changes in product sales mix, from higher margin single chamber systems to
lower margin dual chamber systems. In addition, gross margin in fiscal 1998 was
negatively
 
                                       17
<PAGE>
impacted by approximately $2.5 million of charges to increase reserves for
potentially excess and obsolete inventory. While the Company has and is
continuing to manage its expenses to partially offset this loss of income from
the decline in revenue and gross margins, it is anticipated that this slowdown
in the industry will continue into next fiscal year and will continue to have a
material adverse affect on the Company's business, financial condition, revenues
and operating results.
 
RESULTS OF OPERATIONS
 
    The following table sets forth consolidated statements of operations data of
the Company expressed as a percentage of net sales for the periods indicated:
 
<TABLE>
<CAPTION>
                                                                       YEARS ENDED SEPTEMBER 30,
                                                                    -------------------------------
                                                                      1998       1997       1996
                                                                    ---------  ---------  ---------
<S>                                                                 <C>        <C>        <C>
Net sales.........................................................      100.0%     100.0%     100.0%
Cost of sales.....................................................       58.9       55.5       50.7
                                                                    ---------  ---------  ---------
Gross margin......................................................       41.1       44.5       49.3
                                                                    ---------  ---------  ---------
Operating expenses:
  Costs associated with reduction in force(1).....................        1.7         --         --
  Provision for uncollectible account(2)..........................         --        3.7         --
  Research and development........................................       20.4       14.4       14.2
  Selling, general and administrative.............................       28.6       24.1       25.4
                                                                    ---------  ---------  ---------
  Total operating expenses........................................       50.7       42.2       39.6
                                                                    ---------  ---------  ---------
Operating income (loss)...........................................       (9.6)       2.3        9.7
  Other income (expense):
  Interest expense................................................         --        (.1)        --
  Interest and other income.......................................        1.1         .6        1.0
  Gain on sale of investment(3)...................................         --        1.0         .1
                                                                    ---------  ---------  ---------
Income (loss) before provision (credit) for income taxes..........       (8.5)       3.8       10.8
Provision (benefit) for income taxes..............................       (2.8)       1.3        3.8
                                                                    ---------  ---------  ---------
Net income (loss).................................................       (5.7)%       2.5%       7.0%
                                                                    ---------  ---------  ---------
                                                                    ---------  ---------  ---------
</TABLE>
 
    NET SALES.  Net sales consist of revenues from system sales, spare part and
upgrade sales and maintenance. Net sales decreased 17.2% to $100.4 million in
fiscal 1998 from $121.3 million in fiscal 1997, and decreased 46.6% to $127.0
million in fiscal 1996. The decrease in sales from year to year is primarily the
result of the severe worldwide business slowdown in the semiconductor industry
that began in 1996 with a slowdown of equipment purchases by major North
American IC manufacturers and eventually spread to nearly all types of IC
manufacturers in nearly all geographic regions, including Asia/Pacific. This
industry slowdown is due in large part to a DRAM supply and demand imbalance,
depressed DRAM pricing, and the poor economic climate in Asia and Japan.
Additionally, logic and microprocessor manufacturers have been adversely
impacted by price decreases resulting from the introduction of the sub $1,000
personal computer ("PC") and the PC industry's move to a "quick turns" inventory
program. As a result of the above, the Company is experiencing delays in
receiving new orders and rescheduling or cancellations of previously ordered
equipment by North America and Asian customers, in particular, which materially
adversely affected sales for the last half of fiscal 1996 and all of fiscal 1997
and fiscal 1998. It is anticipated that the semiconductor downturn and the
resultant delays and cancellations and rescheduling will continue to adversely
impact the Company's business, financial condition and results of operations for
the foreseeable future.
 
    Sales of single chamber ash/strip products have been significantly adversely
impacted by the business slowdown, partially offset by a significant increase in
sales of PEP dual chamber systems. Approximately
 
                                       18
<PAGE>
50% and 62% of the Company's net system sales in fiscal 1998 and 1997,
respectively, were from PEP products, including both the photoresist removal and
the post etch residue removal systems, as compared to less than 10% of net
system sales in fiscal 1996.
 
    International sales, which are predominantly to customers based in Europe
and Asia Pacific, accounted for approximately 45%, 55% and 54% of total net
sales in fiscal 1998, 1997 and 1996, respectively. Sales to customers in North
America increased to 55% of total sales in fiscal 1998 from 45% in fiscal 1997
and 46% in fiscal 1996. In Europe, sales increased to 24% of total net sales in
fiscal 1998 from 16% in fiscal 1997 and 20% in fiscal 1996. For Japan and Asia
Pacific, sales decreased to 21% in fiscal 1998 from 38% and 33% in fiscal 1997
and 1996, respectively. The decrease in the Japan and Asia Pacific sales in
fiscal 1998 is attributable primarily to the financial crisis in that region.
Despite the general decline in international sales in 1998, the Company has
continued to invest significant resources in international markets, particularly
in Japan, Singapore, Taiwan, and the United Kingdom during fiscal 1998 in an
attempt to increase its global market share. The Company's percentage of
international sales will continue to fluctuate from period to period, but the
Company anticipates that international sales will continue to account for a
significant portion of net sales in fiscal 1999. The current Asian economic
slowdown, however, may have a significant adverse impact on international net
sales in fiscal 1999.
 
    With the continuing financial crisis in Asia and Japan and the apparent
continued caution by North American customers, the Company anticipates that its
total net sales for the next several quarters in fiscal 1999 will be below prior
period levels, and may fall below the Company's net sales for the quarter ended
September 30, 1998.
 
    GROSS MARGIN.  The Company's gross margin as a percentage of net sales was
41.1% in fiscal 1998, 44.5% in fiscal 1997 and 49.3% in fiscal 1996. The
decrease in gross margin for fiscal years 1998 and 1997 primarily reflects the
impact of the Company's under-absorbed manufacturing overhead and under
utilization of the field service and support infrastructure resulting from lower
net sales and lower sales volume of the Company's more mature, higher margin
single chamber systems. Additionally, gross margin in fiscal 1998 was negatively
impacted by approximately $2.5 million of charges to increase reserves for
potentially excess manufacturing and spare parts inventory resulting from the
reduction in product demand and for certain potentially obsolete finished units.
The charge related to finished units was for certain older generation single
chamber products which have not met sales expectations. This reserve was also
driven partially by the success of the Company's Performance Enhancement
Platform (PEP) in that customers have transitioned to the multi-chamber PEP
platform faster than anticipated resulting in reduced demand for single chamber
systems. The Company expects that its gross margin will continue to be
materially adversely impacted by inefficiencies associated with new product
introductions, sales of lower margin multi-chamber and flat panel display
systems, competitive pricing pressures, the general slowdown in the
semiconductor industry, the economic troubles currently being experienced by
many countries in Asia, including companies in some of the Company's major
markets such as Japan and Korea, changes in product mix and other factors. The
Company will continue to focus on its gross margin improvement programs,
including the introduction of new value-added applications, features and options
on the PEP systems, targeted cost reduction programs and controlled spending.
However, the Company expects that its gross margin rates for the next several
quarters in fiscal 1999 will decline as compared to prior year comparable
periods due to the impact of anticipated lower sales volume and the fixed cost
of manufacturing, service and support.
 
    PROVISION FOR UNCOLLECTIBLE ACCOUNT.  In the third quarter of fiscal 1997,
the Company recorded an expense of $4.5 million related to the write-off of an
uncollectible account receivable (see Note 2 of Notes to the Consolidated
Financial Statements).
 
    COSTS ASSOCIATED WITH REDUCTION IN FORCE.  In fiscal 1998, the Company
reduced its workforce by approximately 22% in response to market conditions and
recorded a charge of $1.7 million primarily for
 
                                       19
<PAGE>
the costs of severance compensation and consolidation of facilities. As of
September 30, 1998 approximately $946,000 of the $1.7 million has been paid and
$754,000 remains on the Company's books as an accrual.
 
    RESEARCH AND DEVELOPMENT (R&D).  The Company's R&D expenses consist
primarily of salaries, project materials, consultant fees and other costs
associated with the Company's R&D efforts. The Company's R&D expenses as a
percentage of net sales increased to 20.4% in fiscal 1998 from 14.4% in fiscal
1997 and 14.2% in fiscal 1996. In absolute dollars, R&D expenses increased to
$20.5 million in fiscal 1998 from $17.4 million and $18.0 million in fiscal 1997
and 1996, respectively. The increase in R&D spending in fiscal 1998 from fiscal
1997 and fiscal 1996 is primarily attributable to the development of several new
product and process capabilities for advanced photoresist and advanced clean
applications utilizing the Company's PEP platform and for the development of a
300mm platform. Expenses for fiscal 1998 also include approximately $500,000 in
charges related to accelerated write-downs of certain older generation
development equipment and consulting charges. During fiscal 1998, the Company
maintained its R&D spending at pre-slowdown levels to continue critical
programs, particularly the support of the expanding number of available
applications, the development of the 300mm platform and the support of the LCD
flat panel business and applications development of the VHP technology.
 
    During the third and fourth quarters of fiscal 1998, the Company completed a
number of cost reduction programs including reductions in force, reductions in
discretionary spending, a reprioritization of programs, reductions in capital
spending and shut-down days. As a result of these actions the Company
anticipates that R&D expenses in absolute dollars may decrease in fiscal 1999.
 
    SELLING, GENERAL AND ADMINISTRATIVE (SG&A).  The Company's SG&A expenses
decreased to $28.7 million in fiscal 1998 from $29.3 million in fiscal 1997 and
from $32.3 million in fiscal 1996. As a percentage of net sales, SG&A expenses
increased to 28.6% in fiscal 1998 from 24.1% in fiscal 1997 and 25.4% in fiscal
1996. The Company's SG&A expenses for fiscal 1998 include approximately $700,000
in charges primarily for the write-down of older generation demonstration and
evaluation equipment, which is underutilized and is not likely to be sold.
Excluding these charges, fiscal 1998 SG&A expenses would have been lower than
fiscal 1997 by $1.3 million, primarily due to lower third party sales
commissions on international sales. Over the last two years, the Company has
built a worldwide direct sales and support organization which has decreased the
Company's dependence on third party representatives for these services.
Consequently, third party commissions in most regions have been eliminated or
reduced, partially offset by increased expenses related to hiring and other
expenses associated with building the Company's direct sales and support
organizations. The decrease in fiscal 1997 SG&A expenses from fiscal 1996 was
also mostly due to reduced third party commissions and, to a lesser extent, to a
reduction in force that occurred in the fourth quarter of fiscal 1996. The
Company anticipates that SG&A expenses in fiscal 1999, particularly in the first
three quarters, will be lower than the comparable periods of fiscal 1998 as a
result of cost reduction activities implemented during the third and fourth
quarters of fiscal 1998.
 
    OTHER INCOME (EXPENSE).  Other income and expense generally consists of
interest expense, interest income, currency translation gains and losses,
royalty income and gains on sales of stock of a third party. Interest expense of
approximately $26,000, $91,000 and $64,000 was incurred by the Company in fiscal
1998, 1997 and 1996, respectively, primarily as a result of borrowings under a
short-term credit facility from the Bank of Tokyo-Mitsubishi by the Company's
wholly-owned Japanese subsidiary, GaSonics International Japan K.K. As of
September 30, 1998, borrowings under this loan agreement were approximately 296
million yen, which is equivalent to approximately $2.1 million. The increase in
interest and other income in fiscal 1998 from fiscal 1997 is primarily due to
royalty income received in connection with the sale of the Company's industrial
plasma cleaning products and services business that was sold in July 1997. The
decrease in interest and other income in fiscal 1997 from fiscal 1996 is
principally due to a decrease in interest income resulting from a significant
use of cash during the first three quarters of fiscal 1997 to fund operations
and purchase capital equipment including the installation of a new computer
system.
 
                                       20
<PAGE>
    Net income for fiscal 1996 and fiscal 1997 was favorably impacted by sales
of shares held by the Company in a third party corporation, which shares were
received in exchange for technology and certain services rendered in fiscal
1990. The Company realized pretax gains in fiscal years 1996 and 1997 of
approximately $143,000 and $1,215,000, respectively, from these sales (see Note
8 of Notes to the Consolidated Financial Statements). There was no such gains
recorded in fiscal 1998 as the last shares were sold in fiscal 1997.
 
    PROVISION FOR INCOME TAXES/BENEFITS.  The Company had an effective tax
benefit rate of (33.0%) in fiscal 1998 and an effective tax rate of 35% in
fiscal years 1997 and 1996. The Company recognized a tax benefit in fiscal 1998
due to the anticipated carry back of current net operating losses to prior
periods.
 
LIQUIDITY AND CAPITAL RESOURCES
 
    During fiscal 1998, cash, cash equivalents and marketable securities
increased by $7.5 million to $32.3 million at September 30, 1998 from $24.9
million at September 30, 1997. Operations provided cash of approximately $9.5
million and $1.9 million in fiscal 1998 and 1997, respectively, and used cash of
approximately $5.6 million in fiscal 1996. Investing activities utilized cash of
approximately $4.0 million, $5.9 million and $5.7 million in fiscal 1998, 1997
and 1996, respectively, for the acquisition of property and equipment. Fiscal
1996 spending for the acquisition of property and equipment is net of $1.3
million in proceeds received from the sale of equipment by the Company's
wholly-owned Japanese subsidiary. Capital spending in fiscal years 1997 and 1996
included approximately $2.8 million and $2.0 million, respectively, for the
purchase and installation of a new management information system. Investing
activities used cash of approximately $6.1 million in fiscal 1998 for the
purchase of marketable securities and provided cash in fiscal 1997 and fiscal
1996 of approximately $1.7 million and $13.4 million, respectively. Financing
activities in fiscal 1998, 1996 and 1997 provided cash of $2.0 million, $3.9
million and $2.1 million, respectively, primarily from the sale of stock under
the Company's employee stock purchase program. In fiscal 1997, financing
activities also included the repayment of a loan by the Company's Japanese
subsidiary, GaSonics International Japan K.K., to the Bank of Tokyo-Mitsubishi
in the amount of $2.5 million and the acquisition of a new credit facility with
the same bank. At September 30, 1998 borrowings under this agreement totaled
$2.1 million (see Note 6 of Notes to the Consolidated Financial Statements).
 
    At September 30, 1998, the Company had working capital of approximately
$59.7 million. Accounts receivable decreased to $15.0 million at the end of
fiscal 1998 from $28.3 million at the end of fiscal 1997 primarily due to lower
sales. Inventories also decreased to $20.8 million at the end of fiscal 1998
compared to $27.1 million at the end of fiscal 1997 due principally to decreased
inventories resulting from anticipated lower sales volume and charges of $2.5
million taken in the third quarter of fiscal 1998 to increase reserves for
potentially excess raw materials and spare parts inventory and for certain
potentially obsolete finished goods. The Company expects future inventory levels
to fluctuate from period to period, and believes that because of the relatively
long manufacturing cycle of its equipment, its investment in inventories will
continue to require a significant portion of working capital. As a result of
such investment in inventories, the Company may be subject to an increasing risk
of inventory obsolescence, which could materially adversely affect the Company's
operating results.
 
    At September 30, 1998, the Company's principal sources of liquidity
consisted of approximately $14.7 million of cash and cash equivalents, $17.6
million in marketable securities, and $20.0 million available under the
Company's unsecured working capital line of credit with Union Bank which expires
on March 31, 1999. A commercial letter of credit provision of $500,000 and a
foreign exchange contract provision of $1.0 million are also provided under the
line of credit. This line of credit bears interest at the bank's LIBOR rate plus
1.25% per annum. Available borrowing under the credit line is reduced by the
amount of outstanding letters of credit. As of September 30, 1998, except for
$69,193 outstanding under the letter of credit provision, there were no
borrowings under this line. This line of credit contains certain
 
                                       21
<PAGE>
covenants, including covenants relating to financial ratios and tangible net
worth which must be maintained by the Company. The Company was not in compliance
with the line of credit profitability covenant as of June 30, 1998 because of
the loss for the fiscal year. However, Union Bank waived the Company's
non-compliance with this covenant and amended the Loan Agreement to provide for
the payment by the Company of a commitment fee on the average unused portion of
the credit line for the preceding quarter in the amount of .15% per annum and
amended the profitability covenant to provide that the Company may not incur a
net loss exceeding $5.0 million for the six month period beginning July 1, 1998
and ending December 31, 1998. After such time, the Company must maintain a net
profit to avoid violating the covenant. As of September 30, 1998, the Company
was in compliance with its bank covenants. The Company's wholly-owned Japanese
subsidiary, GaSonics International Japan K.K., has a credit facility with the
Bank of Tokyo-Mitsubishi with an available credit line of 300 million Japanese
yen which, as of September 30, 1988, is equivalent to approximately $2.1 million
U.S. dollars. This credit facility bears interest at a rate of 1.65% per annum,
is secured by a Letter of Guarantee issued by the Company and expires on March
31, 1999. As of September 30, 1998, GaSonics International Japan K.K. had
borrowed 296 million yen under this credit facility, which is equivalent to
approximately $2.1 million as of that date (see Note 6 of Notes to the
Consolidated Financial Statements).
 
    The Company believes that its existing cash, cash equivalents, marketable
securities and available lines of credit at September 30, 1998 are sufficient to
meet the Company's cash requirements during the next twelve months. Beyond the
next twelve months, the Company may require additional equity or debt financing
to achieve its working capital or capital equipment needs. There can be no
assurance that additional financing will be available when required or, if
available, will be on reasonable terms.
 
YEAR 2000 READINESS DISCLOSURE
 
    The Year 2000 compliance issue (in which systems do not properly recognize
date sensitive information when the year changes to 2000) creates certain risks
for the Company. To address the issue, the Company has assembled a task force to
assure that the products and systems supplied to the Company and the products
the Company supplies to its customers, are Year 2000 compliant and to review and
assess internal software, data management, accounting, manufacturing and
operational systems to ensure that they do not malfunction as a result of the
Year 2000 date transition.
 
    The Company is working with its significant suppliers and is preparing a
contingency plan to address the possibility that one or more suppliers may not
be able to provide Year 2000 compliant products or services in a timely manner.
The Company's contingency plans are expected to address alternative solutions
including alternative sources for such products or services. Such contingency
plans are scheduled to be completed by September 30, 1999. With respect to
compliance of the products the Company supplies to its customers, the Company
intends to adhere to Year 2000 test case scenarios established by SEMATECH, an
industry group comprised of U.S. semiconductor and semiconductor equipment
manufacturers. There can be no assurance that the Company's products do not
contain, and will not continue to contain, undetected errors associated with
Year 2000 date functions that may result in material costs to the Company,
including increased repair and warranty costs and costs incurred in litigation
due to any such defects.
 
    The Company relies heavily on its existing application software and
operating systems for its internal operations. If internal data management,
accounting and/or manufacturing or operational software and systems do not
adequately or accurately process or manage day or date information beyond the
year 1999, there could be a material adverse impact on the Company's operations.
The Company's failure to ensure Year 2000 compliance of its internal systems may
cause disruption in the Company's automated accounting, financial planning, data
management and manufacturing operations which could have a material effect on
the Company's short-term ability to manage its day-to-day operations in an
efficient, cost-effective and reliable manner. Assessment and corrective
measures are proceeding in parallel. These assessment and corrective measures
are intended to encompass all significant categories of systems used by the
Company,
 
                                       22
<PAGE>
including data management, accounting, manufacturing, sales, human resources and
operational software and systems. The Company's assessment efforts are
substantially complete and the Company currently expects that its assessment,
corrective measures and contingency planning (where necessary) will be complete
by the end of fiscal 1999, with the goal of resolving all material internal
programs and systems prior to the Year 2000 date transition.
 
    In connection with the Company's assessment and corrective measures, both to
ensure that the operating systems accompanying its products and that its
internal products and systems, are Year 2000 compliant, the Company expects both
to replace some software and systems and to upgrade others where appropriate.
Where the Company cannot upgrade certain components of its current products, the
Company may replace non-compliant operating systems with systems demonstrated to
be Year 2000 compliant in both new products and installed products. With respect
to products no longer offered by the Company but still in use, the Company may
offer, for a fee, upgrades to make such products Year 2000 compliant or may
decide not to offer any such upgrades. With respect to products and systems
supplied to the Company for use internally, the Company intends to upgrade all
material non-compliant products and systems and, where necessary or where no
reasonable upgrade is available, replace such non-compliant products and systems
with products and systems demonstrated to be Year 2000 compliant.
 
    The Company is in the process of identifying for its customers the
corrective measures necessary to ensure that its installed products are Year
2000 compliant, including compliance of third-party products (such as software)
incorporated into the Company's installed products. In this regard, the Company
is incurring, and will continue to incur throughout fiscal 1999, various
expenses to provide customer support regarding Year 2000 issues, and certain of
such expenses are expected to be passed on to the Company's customers. The
Company's failure to ensure, at all or in a timely or reasonable manner, that
its products are Year 2000 compliant may cause disruption in the customer's
ability to derive expected productivity from those products or to integrate the
products fully and functionally into certain automated manufacturing
environments and, therefore, could lead to increased customer dissatisfaction,
increased warranty and repair costs and a material adverse effect on the
Company's business, financial condition and results of operations.
 
    The Company estimates that the costs directly related to addressing Year
2000 issues, both in its products and internally, will be approximately $2
million to $3 million, of which approximately $1 million has been spent as of
September 30, 1998.
 
    The Company believes that its Year 2000 compliance project and contingency
plans will be completed on a timely basis, and in advance of the Year 2000 date
transition and will not have a material adverse effect on the Company's
business, financial condition or results of operations. However, there can be no
assurance that unexpected delays or problems, including the failure to ensure
Year 2000 compliance by systems or products supplied to the Company by a third
party, will not have an adverse effect on the Company, its financial
performance, its relationship with its customers or the competitiveness or
customer acceptance of its products. Further, the Company's current
understanding of expected costs is subject to change as the project progresses
and does not include potential costs related to actual customer claims,
including claims for warranty and repair, or the cost of internal software and
hardware replaced in the normal course of business, the installation of which
may be accelerated to provide solutions to Year 2000 compliance issues.
 
ADDITIONAL RISK FACTORS
 
SIGNIFICANT FLUCTUATIONS IN OPERATING RESULTS
 
    The Company's operating results have fluctuated significantly in the past
and will continue to fluctuate significantly in the future. The Company
anticipates that factors continuing to affect its future operating results will
include the cyclicality of the semiconductor industry and the markets served by
the Company's customers, particularly the current prolonged, severe worldwide
semiconductor slowdown, the
 
                                       23
<PAGE>
timing and terms of significant orders, patterns of capital spending by
customers, the proportion of direct sales and sales through distributors, the
proportion of international sales to net sales, changes in pricing by the
Company, its competitors, customers or suppliers, market acceptance of new and
enhanced versions of the Company's products, inventory obsolescence, accounts
receivable write-offs, the mix of products sold, financial systems, procedures
and controls, discounts, the timing of new product announcements and releases by
the Company or its competitors, delays, cancellations or rescheduling of orders
due to customer financial difficulties or otherwise, the Company's ability to
produce systems in volume and meet customer requirements, the ability of any
customer to finance its purchases of the Company's equipment, changes in
overhead absorption levels due to changes in the number of systems manufactured,
political and economic instability throughout the world, particularly in the
Asia-Pacific region, and lengthy sales cycles. The Company's gross margins have
varied and will continue to vary materially based on a variety of factors
including the mix and average selling prices of systems sales, the mix of
revenues, including service and support revenues, and the costs associated with
new product introductions and enhancements and the customization of systems.
Furthermore, announcements by the Company or its competitors of new products and
technologies could cause customers to defer purchases of the Company's existing
systems, which would also materially adversely affect the Company's business,
financial condition and results of operations. For example, the Company has
experienced and expects to continue to experience decreased sales of its single
chamber products due to the introduction of the PEP systems. The Company's gross
margin and overall gross margin rate has sharply declined from the level
attained in prior years, in part, due to an increased under absorption of
manufacturing overhead and under utilization of the field service and support
infrastructure resulting from lower net sales, changes in product mix from fewer
higher margin rate and mature single chamber products to lower margin rate dual
chamber products, start-up inefficiencies associated with new products,
competitive pricing pressures, products sold by the Company's liquid crystal
display manufacturing equipment (LCD) division in Japan, and other factors.
Additionally, the Company's sales and earnings for approximately the last two
years were materially adversely affected by the current worldwide semiconductor
business slowdown and it is anticipated that the slowdown in the industry will
continue to have a material adverse effect on the Company's future revenues and
operating results for the next several quarters. There can be no assurance that
the Company will be able to maintain its sales at current levels.
 
LIMITED SYSTEM SALES; BACKLOG
 
    The Company derives a substantial portion of its sales from the sale of
systems which typically range in price from approximately $150,000 to $850,000
for its photoresist and post-etch residue removal systems and up to
approximately $2.0 million or more for many of its other products. As a result,
the timing of revenue recognition for even a single transaction has had and
could continue to have a material adverse effect on the Company's sales and
operating results. The Company's backlog at the beginning of a quarter typically
does not include all sales required to achieve the Company's sales objectives
for that quarter. Moreover, all customer purchase orders are subject to
cancellation or rescheduling by the customer with limited or no penalties and,
therefore, backlog at any particular date is not necessarily representative of
actual sales to be expected for any succeeding period. The Company has in the
past, experienced and expects to continue to experience cancellations and
rescheduling of orders. As a result, the Company's net sales and operating
results for a quarter depend upon the Company obtaining orders for systems to be
shipped in the same quarter that the order is received. The Company's business
and financial results for a particular period could be materially adversely
affected if an anticipated order for even one system is not received in time to
permit shipment during such period. Furthermore, most of the Company's quarterly
net sales have recently been realized near the end of the quarter. A delay in a
shipment near the end of a particular quarter, due, for example, to an
unanticipated shipment rescheduling, to cancellations or deferrals by customers,
to unexpected manufacturing difficulties experienced by the Company, additional
customer configuration requirements or to supply shortages, may cause net sales
in a particular quarter to fall significantly below the Company's expectations
and may materially adversely affect the Company's
 
                                       24
<PAGE>
operating results for any such quarter. In addition, significant investments in
research and development, capital equipment and customer service and support
capability worldwide have resulted in significant fixed costs which the Company
has not been and will not be able to reduce rapidly if sales goals for a
particular period are not met. Because the Company builds its systems according
to forecast, a reduction in customer orders or backlog will lead to excess
inventory and possibly inventory obsolescence, increased costs and reduced
margins which could materially adversely effect the Company's business,
financial condition and results of operations. The impact of these and other
factors on the Company's operating results in any future period cannot be
forecasted accurately. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
 
CYCLICALITY OF SEMICONDUCTOR INDUSTRY
 
    The Company's business depends in significant part upon capital expenditures
by manufacturers of semiconductor devices, including manufacturers that are
opening new or expanding existing fabrication facilities which, in turn, depend
upon the current and anticipated market demand for such devices and products
utilizing such devices. The semiconductor industry is highly cyclical and
historically has experienced periods of oversupply, resulting in significantly
reduced demand for capital equipment, including systems manufactured and
marketed by the Company. Beginning in 1996, the worldwide semiconductor industry
has experienced a severe cyclical downturn, which has extended throughout 1998.
During this period, the Company has experienced significant cancellations and
delays of new orders and rescheduling of existing orders that have materially
adversely affected the Company's financial results and the Company expects such
factors will continue to materially adversely affect its future financial
results. Accordingly, the Company can give no assurance that it will be able to
increase or even maintain its current level of sales. Additionally, the Company
anticipates that a significant portion of new orders depend upon demand from
integrated circuit (IC) manufacturers building or expanding large fabrication
facilities, and there can be no assurance that such demand will exist
particularly in light of the announcements by several companies in the IC market
of lower than expected earnings or losses, as well as restructurings and
layoffs. See "Business--Industry Background."
 
HIGHLY COMPETITIVE INDUSTRY
 
    The semiconductor capital equipment industry is intensely competitive. A
substantial investment is required by customers to install and integrate capital
equipment into a semiconductor production line. As a result, once a
semiconductor manufacturer has selected a particular supplier's capital
equipment, the manufacturer often relies for a significant period of time upon
that equipment for the specific production line application and frequently will
attempt to consolidate its other capital equipment requirements with the same
supplier. Accordingly, it is difficult for the Company to sell to a particular
customer for a significant period of time if that customer selects a
competitor's capital equipment. The Company currently has only one principal
product line and experiences intense competition worldwide from a number of
foreign and domestic manufacturers, including Canon, Applied Materials, Inc.,
Eaton Corporation, Lam Research Corporation, Matrix Semiconductor Systems, Inc.,
Mattson Technology, Inc., Plasma Systems and MC Electronics, some of which have
substantially greater installed bases and greater financial, marketing,
personnel, technical and other resources than the Company. One of the Company's
competitors, Fusion, was acquired by Eaton Corporation, a very large
corporation, further enhancing the resources of one of the Company's
competitors. The Company believes that the industry will continue to be subject
to increased consolidation which will increase the number of larger more
powerful companies in the industry sector in which the Company competes. Certain
of the Company's competitors have announced the introduction of, or have
introduced or acquired, competitive products that offer enhanced technologies
and improvements. For example, Applied Materials and Lam Research have modules
on their products which remove photoresist using dry chemical processing and,
therefore, compete with the Company's products. The Company expects its
competitors to continue to develop, enhance or acquire competitive
 
                                       25
<PAGE>
products that may offer improved price or performance features. New product
announcements, introductions and enhancements by the Company's competitors could
cause a significant decline in sales or loss of market acceptance of the
Company's systems in addition to intense price competition or otherwise could
make the Company's systems or technology obsolete or non-competitive. In
addition, by virtue of its reliance on sales of advanced dry chemistry
processing equipment, the Company could be at a disadvantage compared to certain
competitors that offer more diversified product lines. The Company believes that
it will continue to face competition from current and new suppliers employing
other technologies, such as wet chemistry, traditional dry chemistry and other
techniques, as such competitors attempt to extend the capabilities of their
existing products. Increased competitive pressure has led and may continue to
lead to reduced demand and lower prices for the Company's products, thereby
materially adversely affecting the Company's business, financial condition and
operating results. There can be no assurance that the Company will be able to
compete successfully in the future.
 
    The Company believes that to remain competitive it will have to commit
significant financial resources to develop new product features and
enhancements, to introduce next generation photoresist and residue removal
products on a timely basis, and to maintain customer service and support centers
worldwide. In marketing its products, the Company will face competition from
suppliers employing new technologies in order to extend the capabilities of
competitive products beyond their current limits or increase their productivity.
In addition, increased competitive pressure could lead to intensified
price-based competition, resulting in lower prices and margins, which would
materially adversely affect the Company's business, financial condition and
operating results.
 
    Competitors of the Company's LCD division in Japan include Japan-based
companies and Japan-based joint ventures such as Applied Komatsu, Koyo Lindbergh
and ULVAC. These competitors manufacture alternative technology systems and are
well established in Japan and they could, at any time, enter the Company's
markets with improved technology or with systems that are directly competitive
with those of the Company's LCD division. Late in fiscal 1995, the Company
acquired its LCD division in Japan, but to date, this has not enabled the
Company to significantly penetrate the photoresist removal market in Japan.
Japanese IC process equipment manufacturers dominate the market for certain
types of integrated circuits which use the Company's systems. Japanese
manufacturers are well established in the Japanese process equipment market,
making it difficult for non-Japanese manufacturers to penetrate the Japanese
market. Furthermore, Japanese semiconductor manufacturers have extended their
influence outside of Japan by licensing products and process technologies to
non-Japanese semiconductor manufacturers. Such licenses could result in a
recommendation to use certain semiconductor capital equipment manufactured by
Japanese companies. The Company has not established itself as a major competitor
in the Japanese market and there can be no assurance that the Company will be
able to achieve significant sales to Japanese IC manufacturers or compete
successfully in the future. See "Business--Competition."
 
DEPENDENCE ON KEY CUSTOMERS
 
    Historically, the Company has sold a significant proportion of its systems
in any particular period to a limited number of customers. Sales to the
Company's ten largest customers in fiscal 1996, 1997 and 1998 accounted for
approximately 51%, 66%, and 64% of net sales, respectively. In fiscal 1996,
sales to Intel accounted for approximately 11% of total net sales. In fiscal
1997, sales to Samsung and Promos Technologies each accounted for approximately
11% of net sales and Intel accounted for approximately 10% of net sales. Intel
and Motorola accounted for approximately 20% and 11%, respectively, of fiscal
1998 net sales. The Company expects that sales of its products to relatively few
large customers will continue to account for a high percentage of net sales in
the foreseeable future. None of the Company's customers has entered into a
long-term agreement requiring it to purchase the Company's products. Moreover,
sales to certain of its customers have decreased as those customers have
completed or delayed purchasing requirements for new or expanded fabrication
facilities. Although the composition of the group comprising the Company's
largest customers has varied from year to year, the loss of a significant
customer
 
                                       26
<PAGE>
or any reduction in orders from any significant customer, including reductions
due to customer departures from recent buying patterns, market, economic or
competitive conditions in the semiconductor industry or in the industries that
manufacture products utilizing ICs, has materially adversely affected and could
in the future materially adversely affect the Company's business, financial
condition and results of operations. The Company's ability to increase or
maintain current sales levels in the future will depend, in part, upon its
ability to obtain orders from new customers as well as the financial condition
and success of its customers and the general economy, of which there can be no
assurance. See "Business--Customers."
 
EXPANSION OF OPERATIONS; MANAGEMENT OF GROWTH
 
    Since 1993, the Company has significantly increased the scale of its
operations to support sales levels and, despite recent layoffs, has generally
expanded its operations to address critical infrastructure requirements,
including the hiring of additional personnel, commencement of independent
operations in the United Kingdom, Ireland, France, Italy, Korea, Japan,
Singapore, Taiwan and Israel and significant investments in research and
development to support product development. In addition, in 1998, the Company
hired a new President and Chief Executive Officer. The Company's expansion has
resulted in significantly higher operating expenses and until there is a
sustained upturn in the semiconductor industry resulting in an increased demand
for equipment, it is anticipated that the Company's future operating results
will continue to be materially adversely affected through at least the next
several quarters.
 
    The past growth in the Company's sales and expansion in the scope of its
operations has placed a considerable strain on its management, financial and
other resources and has required the Company to initiate an extensive
reevaluation of its operating and financial systems, procedures and controls.
The Company implemented new management information, manufacturing and cost
accounting systems during the second quarter of fiscal 1997 and continues to
implement new management systems, particularly in the area of inventory control,
to better enable it to manage its business. There can be no assurance, however,
that any existing or new systems, procedures or controls will be adequate to
support the Company's operations or that its new systems will be implemented in
a cost-effective and timely manner.
 
RAPID TECHNOLOGICAL CHANGE; IMPORTANCE OF TIMELY PRODUCT INTRODUCTION
 
    The semiconductor manufacturing industry is subject to rapid technological
change and new product introductions and enhancements. The Company's ability to
be competitive will depend in large part upon its ability to develop new and
enhanced systems and to introduce these systems at competitive prices and in a
timely and cost effective manner to enable customers to integrate the systems
into their operations either prior to or upon commencement of volume product
manufacturing. In addition, new product introductions or enhancements by the
Company's competitors could cause a decline in sales or loss of market
acceptance of the Company's existing products. Increased competitive pressure
has led to intensified price-based competition resulting in lower prices and
margins, which has and could continue to materially adversely affect the
Company's business, financial condition and results of operations. Any success
of the Company in developing, introducing and selling new and enhanced systems
depends upon a variety of factors including product selection, timely and
efficient completion of product design and development, timely and efficient
implementation of manufacturing and assembly processes, effective sales and
marketing and product performance in the field. In particular, the Company's
future performance will depend in part upon the successful commercialization of
the VHP, LPCVD systems and 300mm systems. There can be no assurance that any
such product will achieve significant revenues, if any, or enhance the Company's
profitability. Because new product development commitments must be made well in
advance of sales, new product decisions must anticipate both the future demand
for the type of ICs under development by leading IC manufacturers and the
equipment required to produce such ICs. There can be no assurance that the
Company will be successful in selecting, developing, manufacturing and marketing
new products or in enhancing existing products and any failure could have a
material adverse effect on the Company's business, financial condition and
results of operations.
 
                                       27
<PAGE>
    Because of the large number of components in, and the complexity of, the
Company's systems, significant delays can occur between a system's initial
introduction and the commencement of volume production. As is typical in the
semiconductor capital equipment market, the Company has experienced delays from
time to time in the introduction of, and certain technical, quality and
manufacturing difficulties with, certain of its systems and enhancements and may
continue to experience delays and technical and manufacturing difficulties in
future introductions or volume production of new systems or enhancements. The
Company's inability to complete the development or meet the technical
specifications of any of its new systems or enhancements or to manufacture and
ship these systems or enhancements in volume and in a timely manner would
materially adversely affect the Company's business, financial condition and
results of operations as well as its customer relationships. In addition, the
Company may incur substantial unanticipated costs to ensure the functionality
and reliability of its future product introductions early in the product's life
cycle. If new products have reliability or quality problems, the Company may
experience decreased sales, loss of customers, reduced orders or higher
manufacturing costs, increased costs, delays in collecting accounts receivable
and additional service and warranty expenses, any of which could materially
adversely affect the Company's business, financial condition and results of
operations. See "Business--Research and Development."
 
LENGTHY SALES CYCLE
 
    Sales of the Company's systems depend, in significant part, upon the
decision of a prospective customer to increase manufacturing capacity through
the expansion of existing fabrication facilities or the opening of new
facilities, which typically involves a significant capital commitment. The
Company often experiences delays in finalizing system sales following initial
system qualification while the customer evaluates and receives approvals for the
purchase of the Company's systems and completes a new or expanded facility. Due
to these and other factors, the Company's systems typically have a lengthy sales
cycle during which the Company may expend substantial funds and management
effort which may not ultimately lead to actual sales. The Company believes that
the length of the sales cycle will continue to increase as certain of its
customers centralize purchasing decisions into one decision making entity and
continue to be cautious in their purchase decisions due to the current severe
downturn in the semiconductor market, which is expected to intensify the
evaluation process and require additional sales and marketing expenditures by
the Company. Lengthy sales cycles subject the Company to a number of significant
risks, including obsolescence and fluctuations and non-predictability of
operating results, over which the Company has little or no control.
 
RISKS ASSOCIATED WITH THE JAPANESE MARKET
 
    The Company believes that increased penetration of the Asia Pacific market,
particularly Japan, will be essential to its future financial performance. To
date, however, the Company has sold relatively few systems to Japanese
semiconductor manufacturers. Sales in Japan accounted for approximately 9% of
the Company's total net sales in both fiscal 1996 and fiscal 1997 and 4% of
total net sales in fiscal 1998. The Japanese semiconductor market (including
fabrication plants operated outside of Japan by Japanese semiconductor
manufacturers) represents a substantial percentage of the worldwide
semiconductor manufacturing capacity, and has been difficult for non-Japanese
companies to penetrate. Furthermore, the licensing of products and process
technologies by Japanese semiconductor manufacturers to non-Japanese
semiconductor manufacturers has resulted in recommendations to use certain
semiconductor capital equipment manufactured by Japanese companies. Late in
fiscal 1995, the Company acquired its LCD division in Japan, but to date, this
has not enabled the Company to significantly penetrate the photoresist removal
market in Japan. As a relatively recent entrant, the Company is at a distinct
competitive disadvantage in the Japanese market compared to leading Japanese
suppliers, many of which have long-standing collaborative relationships with
Japanese semiconductor manufacturers. In addition, since 1992, Japanese
semiconductor manufacturers have substantially reduced their levels of capital
spending on new fabrication facilities and equipment, particularly over the past
two years due to the overall downturn in the
 
                                       28
<PAGE>
Japanese economy and the severe downturn in the worldwide semiconductor market,
thereby, further increasing competitive pressures in the Japanese market.
Although the Company is investing significant resources, and has established a
direct presence, in Japan, which has and will significantly increase operating
expenses, there can be no assurance that the Company will be able to achieve
significant sales to the Japanese semiconductor market, which failure could
materially adversely affect the Company's business, financial condition and
results of operations. See "Business--Sales, Service and Customer Support."
 
INTERNATIONAL SALES
 
    International sales accounted for 54%, 55%, and 45% of net sales in fiscal
years 1996, 1997 and 1998, respectively. The Company has established independent
operations in the United Kingdom, Ireland, France, Italy, Korea, Japan,
Singapore, Taiwan and Israel. The Company anticipates that international sales
will continue to account for a significant portion of net sales. International
sales are subject to certain risks, including unexpected changes in regulatory
requirements, difficulty in satisfying existing regulatory requirements,
exchange rates, foreign currency fluctuations, tariffs and other barriers,
political and economic instability, potentially adverse tax consequences,
natural disasters, outbreaks of hostilities, difficulties in accounts receivable
collection, extended payment terms, difficulties in managing distributors or
representatives and difficulties in staffing and managing foreign subsidiary and
branch operations. The Company is also subject to the risks associated with the
imposition of legislation and import and export regulations. The Company cannot
predict whether tariffs, quotas, duties, taxes or other charges or restrictions
will be implemented by the United States, Japan or any other country upon the
importation or exportation of the Company's products in the future. There can be
no assurance that these factors will not have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business--Sales, Service and Customer Support."
 
INTELLECTUAL PROPERTY RIGHTS
 
    Although the Company attempts to protect its intellectual property rights
through patents, copyrights, trade secrets and other measures, it believes that
its financial performance will depend more upon the innovation, technological
expertise and marketing abilities of its employees than upon such protection.
There can be no assurance that any of the Company's pending patent applications
will be issued or that foreign intellectual property laws will protect the
Company's intellectual property rights. There can be no assurance that any
patent issued to the Company will not be challenged, invalidated or circumvented
or that the rights granted thereunder will provide competitive advantages to the
Company. Furthermore, there can be no assurance that others will not
independently develop similar products, duplicate the Company's products or, if
patents are issued to the Company, design around the patents issued to the
Company.
 
    As is typical in the semiconductor industry, the Company occasionally
receives notices from third parties alleging infringement claims. Although there
are currently no pending claims or lawsuits against the Company regarding any
possible infringement claims, there can be no assurance that infringement claims
against them by third parties or claims for indemnification by the Company's
customers resulting from infringement claims will not be asserted in the future
against the Company or that such assertions, if proven to be true, will not
materially adversely affect the Company's business, financial condition and
results of operations. If any such claims are asserted against the Company, the
Company may seek to obtain a license under the third party's intellectual
property rights if available on reasonable terms or at all. Any such license
would increase the Company's expenses and could cause a material adverse effect
on the Company's business, financial condition and results of operations. The
Company could decide, in the alternative, to resort to litigation to challenge
such claims or enforce its proprietary rights. Litigation, even if successful,
could be extremely expensive and time consuming and could materially adversely
affect the Company's business, financial condition and results of operations.
 
                                       29
<PAGE>
SOLE OR LIMITED SOURCES OF SUPPLY; RELIANCE ON SUBCONTRACTORS; COMPLEXITY IN
  MANUFACTURING PROCESS
 
    Certain components, subassemblies and services necessary for the manufacture
of the Company's systems are obtained from a sole supplier or a limited group of
suppliers. Specifically, the Company relies on three companies for supply of the
robotics, two other companies for microwave power supplies, two companies for
platens, one company for magnetrons and one company for microwave applicators
used in its products. The Company's LCD division in Japan is heavily dependent
on one key supplier for quartz and ceramic fabrication used in its LPCVD
systems. The Company is exploring alternative sources or technology to provide
back up for critical materials when the primary suppliers are unable to deliver.
In addition, the Company has been establishing longer term contracts with these
suppliers to mitigate the potential risks of inadequate supply of required
components and control over pricing and timely delivery of components and
subassemblies. However, the Company is relying increasingly on outside vendors
to manufacture certain components and subassemblies. The Company's reliance on
sole or a limited group of suppliers and the Company's increasing reliance on
subcontractors involve several risks, including a potential inability to obtain
an adequate supply of required components and reduced control over pricing and
timely delivery of components and subassemblies. Because the manufacture of
certain of these components and subassemblies is an extremely complex process
and requires long lead times, there can be no assurance that delays or shortages
caused by suppliers will not occur in the future. Certain of the Company's
suppliers have relatively limited financial and other resources. Any inability
to obtain adequate deliveries or any other circumstance that would require the
Company to seek alternative sources of supply or to manufacture such components
internally could significantly delay the Company's ability to ship its products,
which could damage relationships with current and prospective customers and
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Business--Manufacturing."
 
FUTURE ACQUISITIONS
 
    In the future, the Company may pursue acquisitions of additional product
lines, technologies or businesses. Future acquisitions by the Company may result
in potentially dilutive issuances of equity securities, incurrence of debt and
amortization expenses related to goodwill and other intangible assets, which
could materially adversely affect the Company's business, financial condition
and results of operations. In addition, acquisitions involve numerous risks,
including difficulties in the assimilation of the operations, technologies,
personnel and products of the acquired companies, the diversion of management's
attention from other business concerns, risks of entering markets in which the
Company has no or limited direct prior experience, and the potential loss of key
employees of the acquired company. From time to time, the Company has engaged in
preliminary discussions with third parties concerning potential acquisitions of
product lines, technologies and businesses; however, there are currently no
agreements with respect to any such acquisition. In the event that such an
acquisition does occur, there can be no assurance as to the effect thereof on
the Company's business, financial condition or results of operations.
 
DEPENDENCE ON KEY PERSONNEL
 
    The Company's financial performance will depend in significant part upon the
continued contributions of its officers and key personnel, many of whom would be
difficult to replace. The loss of any key person could have a material adverse
effect on the business, financial condition and results of operations of the
Company. The Company's future operating results depend in part upon its ability
to attract and retain other qualified management, engineering, financial and
accounting, technical, marketing and sales and support personnel for its
operations. Competition for such personnel is intense, and there can be no
assurance that the Company will be successful in attracting or retaining such
personnel. The failure to attract or retain such persons could materially
adversely affect the Company's business, financial condition and results of
operations.
 
                                       30
<PAGE>
ENVIRONMENTAL REGULATIONS
 
    The Company is subject to a variety of governmental regulations relating to
the use, storage, discharge, handling, emission, generation, manufacture and
disposal of toxic or other hazardous substances used to manufacture the
Company's products. The Company believes that it is currently in compliance in
all material respects with such regulations and that it has obtained all
necessary environmental permits to conduct its business. Nevertheless, the
failure to comply with current or future regulations could result in substantial
fines being imposed on the Company, suspension of production, alteration of its
manufacturing process or cessation of operations. Such regulations could require
the Company to acquire expensive remediation equipment or to incur substantial
expenses to comply with environmental regulations. Any failure by the Company to
control the use, disposal or storage of, or adequately restrict the discharge
of, hazardous or toxic substances could subject the Company to significant
liabilities and could result in a material adverse effect on the Company's
business, financial condition and results of operations.
 
EFFECT OF CERTAIN ANTI-TAKEOVER PROVISIONS
 
    As of September 30, 1998, the Company's officers, directors and members of
their families who may be deemed affiliates of such persons beneficially owned
approximately 23% of the Company's outstanding shares of Common Stock.
Accordingly, these stockholders will be able to significantly influence the
election of the Company's directors and the outcome of corporate actions
requiring stockholder approval, such as mergers and acquisitions, regardless of
how other stockholders of the Company may vote. Such a high level of ownership
by such persons or entities may have a significant effect in delaying, deferring
or preventing a change in control of the Company and may adversely affect the
voting and other rights of other holders of Common Stock. Certain provisions of
the Company's Certificate of Incorporation, 1994 Stock Option/Stock Issuance
Plan, Bylaws and Delaware law may also discourage certain transactions involving
a change in control of the Company. In addition to the foregoing, the ability of
the Company's Board of Directors to issue preferred stock without further
stockholder approval could have the effect of delaying, deferring or preventing
a change in control of the Company.
 
VOLATILITY OF STOCK PRICE
 
    The Company believes that factors such as announcements of developments
related to the Company's business, fluctuations in the Company's operating
results, sales of the Company's Common Stock into the market place, failure to
meet or changes in analysts' expectations, general conditions in the
semiconductor industry or the worldwide economy, natural disasters, outbreaks of
hostilities, announcements of technological innovations or new products or
enhancements by the Company or its competitors, developments in patents or other
intellectual property rights and developments in the Company's relationships
with its customers and suppliers could cause the price of the Company's Common
Stock to fluctuate, perhaps substantially. In addition, in recent years the
stock market in general, and the market for shares of small capitalization
stocks such as the Company's, in particular, have experienced extreme price
fluctuations, which have often been unrelated to the operating performance of
affected companies. Moreover, in recent years the stocks of many companies in
the semiconductor capital equipment business, including the stock of the
Company, have declined substantially due to the worldwide semiconductor
downturn. There can be no assurance that the market price of the Company's
Common Stock will not continue to experience significant fluctuations in the
future, including fluctuations that are unrelated to the Company's performance.
 
                                       31
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
 
INTEREST RATE RISK
 
    The Company's exposure to market risk for change in interest rates relates
primarily to the Company's investment portfolio. The Company does not use
derivative financial instruments in its investment portfolio. The Company
invests in high-credit quality issuers and, by policy, limits the amount of
credit exposure to any one issuer. As stated in its policy, the Company ensures
the safety and preservation of its invested principal funds by limiting default
risk, market risk and reinvestment risk.
 
    The Company mitigates default risk by investing in safe and high-credit
quality securities and by constantly positioning its portfolio to respond
appropriately to a significant reduction in a credit rating of any investment
issuer, guarantor or depository. The portfolio includes only marketable
securities with active secondary or resale markets to ensure portfolio
liquidity.
 
    The table below presents principal amounts and related weighted average
interest rates by date of maturity for the Company's investment portfolio (in
thousands):
 
<TABLE>
<CAPTION>
                                                                          FISCAL YEARS
                                                                 -------------------------------
                                                                   1999       2000       2001
                                                                 ---------  ---------  ---------
<S>                                                              <C>        <C>        <C>
Cash equivalents and short-term investments
  Fixed rate short-term investments............................  $  15,631  $   9,419  $     647
  Average interest rate........................................       3.75%      3.88%      3.85%
</TABLE>
 
                                       32
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
                          CONSOLIDATED BALANCE SHEETS
                       (IN THOUSANDS, EXCEPT SHARE DATA)
 
<TABLE>
<CAPTION>
                                                                                                SEPTEMBER 30,
                                                                                            ----------------------
                                                                                               1998        1997
                                                                                            ----------  ----------
<S>                                                                                         <C>         <C>
                                                      ASSETS
Current assets:
  Cash and cash equivalents...............................................................  $   14,698  $   13,307
  Marketable securities...................................................................      17,640      11,577
  Trade accounts receivable, net of allowance for doubtful accounts of $840 in 1998 and
    $720 in 1997..........................................................................      15,026      28,315
  Inventories.............................................................................      20,822      27,075
  Net deferred tax asset..................................................................       5,697       4,868
  Prepaid expenses and other current assets...............................................       7,437       2,617
                                                                                            ----------  ----------
      Total current assets................................................................      81,320      87,759
                                                                                            ----------  ----------
Property and equipment:
  Furniture and fixtures..................................................................         786         758
  Machinery and equipment.................................................................      20,099      16,602
  Leasehold improvements..................................................................       4,023       4,090
                                                                                            ----------  ----------
                                                                                                24,908      21,450
  Less--accumulated depreciation and amortization.........................................     (10,098)     (6,509)
                                                                                            ----------  ----------
      Net property and equipment..........................................................      14,810      14,941
                                                                                            ----------  ----------
Deposits and other assets.................................................................       1,086       1,682
                                                                                            ----------  ----------
      Total assets........................................................................  $   97,216  $  104,382
                                                                                            ----------  ----------
                                                                                            ----------  ----------
 
                                       LIABILITIES AND STOCKHOLDERS' EQUITY
 
Current liabilities:
  Borrowings under credit facility........................................................  $    2,116  $    2,036
  Accounts payable........................................................................       4,008       6,812
  Income taxes payable....................................................................       4,038       3,054
  Other accrued liabilities...............................................................      11,423      12,886
                                                                                            ----------  ----------
      Total current liabilities...........................................................      21,585      24,788
                                                                                            ----------  ----------
Long-term liabilities:
  Deferred rent...........................................................................         223         401
Commitments (Note 9)
Stockholder's equity:
  Preferred stock, $0.001 par value: Authorized shares--2,000,000.........................          --          --
  Common stock, $0.001 par value: Authorized shares--20,000,000
    Outstanding shares--14,169,227 and 13,916,101.........................................          14          14
  Additional paid-in capital..............................................................      37,661      35,833
  Subscription receivable.................................................................          --        (100)
  Retained earnings.......................................................................      37,733      43,446
                                                                                            ----------  ----------
      Total stockholders' equity..........................................................      75,408      79,193
                                                                                            ----------  ----------
      Total liabilities and stockholders' equity..........................................  $   97,216  $  104,382
                                                                                            ----------  ----------
                                                                                            ----------  ----------
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       33
<PAGE>
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                                                                   YEARS ENDED SEPTEMBER 30,
                                                                               ----------------------------------
                                                                                  1998        1997        1996
                                                                               ----------  ----------  ----------
<S>                                                                            <C>         <C>         <C>
Net sales....................................................................  $  100,430  $  121,256  $  127,043
Cost of sales................................................................      59,126      67,292      64,417
                                                                               ----------  ----------  ----------
  Gross margin...............................................................      41,304      53,964      62,626
                                                                               ----------  ----------  ----------
Operating expenses:
  Costs associated with reduction in force (Note 4)..........................       1,681          --          --
  Provision for uncollectible account (Note 2)...............................          --       4,517          --
  Research and development...................................................      20,493      17,410      18,006
  Selling, general and administrative........................................      28,727      29,257      32,250
                                                                               ----------  ----------  ----------
  Total operating expenses...................................................      50,901      51,184      50,256
                                                                               ----------  ----------  ----------
  Operating income (loss)....................................................      (9,597)      2,780      12,370
Other income (expense):
  Interest expense...........................................................         (26)        (91)        (64)
  Interest and other income, net.............................................       1,096         722       1,289
  Gain on sale of investment (Note 8)........................................          --       1,215         143
                                                                               ----------  ----------  ----------
  Income (loss) before provision (benefit) for income taxes..................      (8,527)      4,626      13,738
  Provision (benefit) for income taxes.......................................      (2,814)      1,619       4,808
                                                                               ----------  ----------  ----------
Net income (loss)............................................................  $   (5,713) $    3,007  $    8,930
                                                                               ----------  ----------  ----------
                                                                               ----------  ----------  ----------
Net income (loss) per share--Basic...........................................  $    (0.41) $     0.22  $     0.67
                                                                               ----------  ----------  ----------
                                                                               ----------  ----------  ----------
Net income (loss) per share--Diluted.........................................  $    (0.41) $     0.21  $     0.65
                                                                               ----------  ----------  ----------
                                                                               ----------  ----------  ----------
Weighted average common shares--Basic........................................      14,039      13,635      13,350
                                                                               ----------  ----------  ----------
                                                                               ----------  ----------  ----------
Weighted average common and common equivalent shares--Diluted................      14,039      14,209      13,642
                                                                               ----------  ----------  ----------
                                                                               ----------  ----------  ----------
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       34
<PAGE>
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                       (IN THOUSANDS, EXCEPT SHARE DATA)
 
<TABLE>
<CAPTION>
                                                                             UNREALIZED      NOTE
                              COMMON STOCK       ADDITIONAL                   GAIN ON     RECEIVABLE                   TOTAL
                           -------------------    PAID-IN     SUBSCRIPTION   MARKETABLE      FROM       RETAINED   STOCKHOLDERS'
                             SHARES    AMOUNT     CAPITAL      RECEIVABLE    SECURITIES   STOCKHOLDER   EARNINGS      EQUITY
                           ----------  -------   ----------   ------------   ----------   -----------   --------   -------------
<S>                        <C>         <C>       <C>          <C>            <C>          <C>           <C>        <C>
Balance, September 30,
  1995...................  13,229,541   $ 13      $29,455        $  --        $ 2,376        $(165)     $31,509       $63,188
  Issuance of common
    stock under employee
    stock purchase
    plan.................     197,510     --        1,708           --             --           --           --         1,708
  Issuance of common
    stock under stock
    option plan..........      45,225     --          237           --             --           --           --           237
  Forgiveness of note
    receivable from
    stockholder..........          --     --           --           --             --          100           --           100
  Change in unrealized
    gain on marketable
    securities...........          --     --           --           --         (1,474)          --           --        (1,474)
  Net Income.............          --     --           --           --             --           --        8,930         8,930
                           ----------  -------   ----------      -----       ----------      -----      --------   -------------
 
Balance, September 30,
  1996...................  13,472,276     13       31,400           --            902          (65)      40,439        72,689
  Issuance of common
    stock under employee
    stock purchase
    plan.................     138,325     --        1,348           --             --           --           --         1,348
  Issuance of common
    stock under stock
    option plan..........     305,500      1        3,085         (100)            --           --           --         2,986
  Forgiveness of note
    receivable from
    stockholder..........          --     --           --           --             --           65           --            65
  Change in unrealized
    gain on marketable
    securities...........          --     --           --           --           (902)          --           --          (902)
  Net Income.............          --     --           --           --             --           --        3,007         3,007
                           ----------  -------   ----------      -----       ----------      -----      --------   -------------
 
Balance, September 30,
  1997...................  13,916,101     14       35,833         (100)            --           --       43,446        79,193
  Issuance of common
    stock under employee
    stock purchase
    plan.................     189,177     --        1,198           --             --           --           --         1,198
  Issuance of common
    stock under stock
    option plan..........      63,949     --          630          100             --           --           --           730
  Net Loss...............          --     --           --           --             --           --       (5,713)       (5,713)
                           ----------  -------   ----------      -----       ----------      -----      --------   -------------
Balance, September 30,
  1998...................  14,169,227   $ 14      $37,661        $  --        $    --        $  --      $37,733       $75,408
                           ----------  -------   ----------      -----       ----------      -----      --------   -------------
                           ----------  -------   ----------      -----       ----------      -----      --------   -------------
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       35
<PAGE>
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                                    YEARS ENDED SEPTEMBER 30,
                                                                                ----------------------------------
                                                                                   1998        1997        1996
                                                                                ----------  ----------  ----------
<S>                                                                             <C>         <C>         <C>
Cash flows from operating activities:
  Net income (loss)...........................................................  $   (5,713) $    3,007  $    8,930
  Adjustments to reconcile net income (loss) to net cash provided by (used
    for) operating activities:
    Depreciation and amortization.............................................       3,970       2,773       2,901
    Provision for doubtful accounts...........................................         120       4,637         242
    Forgiveness of note receivable from stockholder...........................          --          65         100
    Write-off of fixed assets.................................................         173          --          --
Changes in assets and liabilities:
    Accounts receivable.......................................................      13,168     (12,564)     (6,300)
    Inventories...............................................................       6,254       2,387      (7,694)
    Prepaid expenses and other current assets.................................      (5,650)       (830)     (3,479)
    Deposits and other assets.................................................         596         554      (1,697)
    Accounts payable..........................................................      (2,804)       (505)        (26)
    Income taxes payable......................................................         984       1,954        (293)
    Accrued liabilities.......................................................      (1,464)        570       2,260
    Deferred rent.............................................................        (178)       (151)        (69)
    Note payable..............................................................          --          --        (439)
                                                                                ----------  ----------  ----------
      Net cash provided by (used for) operating activities....................       9,456       1,897      (5,564)
                                                                                ----------  ----------  ----------
Cash flows from investing activities:
  Purchases of marketable securities..........................................     (67,114)    (25,636)    (55,097)
  Proceeds from sales of marketable securities................................      61,051      27,292      68,492
  Purchases of property and equipment.........................................      (4,011)     (5,935)     (6,979)
  Proceeds from sales of property and equipment...............................          --          --       1,254
                                                                                ----------  ----------  ----------
      Net cash provided by (used for) investing activities....................     (10,074)     (4,279)      7,670
                                                                                ----------  ----------  ----------
Cash flows from financing activities:
  Payments of note payable to bank............................................          --      (2,455)         --
  Proceeds from borrowings under credit facility..............................          80       2,036          --
  Proceeds from issuance of common stock......................................       1,929       4,334       2,073
                                                                                ----------  ----------  ----------
      Net cash provided by financing activities...............................       2,009       3,915       2,073
                                                                                ----------  ----------  ----------
Net increase in cash and cash equivalents.....................................       1,391       1,533       4,179
Cash and cash equivalents at beginning of period..............................      13,307      11,774       7,595
                                                                                ----------  ----------  ----------
Cash and cash equivalents at end of period....................................  $   14,698  $   13,307  $   11,774
                                                                                ----------  ----------  ----------
                                                                                ----------  ----------  ----------
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                   statements
 
                                       36
<PAGE>
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
                               SEPTEMBER 30, 1998
 
1. ORGANIZATION AND OPERATIONS OF THE COMPANY:
 
    GaSonics International Corporation (the "Company") is a leading global
supplier of products and services used in the fabrication of advanced integrated
circuits ("semiconductors" or "ICs") and flat panel displays ("FPDs"). The
Company markets its products in the United States, Europe, and the Asia Pacific
region primarily to large semiconductor and liquid crystal manufacturing
concerns. The Company is subject to a number of risks including, but not limited
to, volatility in the semiconductor markets and the related demand for
semiconductor equipment and the risk of inventory obsolescence resulting from
new product developments by competitors.
 
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
 
    PRINCIPLES OF CONSOLIDATION.  The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries and branches after
elimination of intercompany accounts and transactions.
 
    USE OF ESTIMATES.  The preparation of consolidated 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 disclosures of contingent assets and liabilities at the date of
consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ materially
from those estimates.
 
    FISCAL YEAR.  The Company maintains a fifty-two/fifty-three week fiscal year
cycle ending on the Saturday closest to September 30. Fiscal 1998, fiscal 1997
and fiscal 1996 contain fifty-two weeks. For external reporting purposes, the
Company indicates its fiscal period as ending on September 30.
 
    CASH AND CASH EQUIVALENTS.  For purposes of the Consolidated Statements of
Cash Flows, the Company considers all highly liquid investments with an original
maturity of 90 days or less to be cash equivalents.
 
    Cash paid for interest, including amounts paid under capital lease
obligations, and domestic and foreign income taxes was as follows (in
thousands):
 
<TABLE>
<CAPTION>
                                                                          YEARS ENDED SEPTEMBER 30,
                                                                       -------------------------------
                                                                         1998       1997       1996
                                                                       ---------  ---------  ---------
<S>                                                                    <C>        <C>        <C>
Interest.............................................................  $      25  $      94  $      41
Income taxes.........................................................  $     224  $     625  $   6,188
</TABLE>
 
    The Company had one significant non-cash transaction for the year ended
September 30, 1997 related to the Submicron Technologies PLC (see Concentration
of Credit Risk below) write-off of their uncollectible account. Non-cash
activity included a before tax bad debt expense of $4.5 million.
 
    INVESTMENTS IN MARKETABLE SECURITIES.  Pursuant to the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities", the Company's investments
are classified as available-for-sale and are stated at fair value. Material
unrealized gains and losses are recorded as a separate component of
stockholders' equity, net of tax. The Company's investments in debt securities
mature at various dates through December 2000.
 
                                       37
<PAGE>
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                               SEPTEMBER 30, 1998
 
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
    The fair value of available-for-sale securities was determined based on
quoted market prices at the reporting date for the instruments.
 
    The components of available-for-sale securities by major security type as of
September 30, 1998 and 1997 are as follows (in thousands):
 
<TABLE>
<CAPTION>
                                                                                          GROSS
                                                                                       UNREALIZED
                                                              AMORTIZED    AGGREGATE     HOLDING
                                                                COST      FAIR VALUE      GAINS
                                                             -----------  -----------  -----------
<S>                                                          <C>          <C>          <C>
FISCAL 1998
Debt securities issued by states of the United States and
  political subdivisions of the states.....................   $  25,774    $  25,774    $      --
 
FISCAL 1997
Debt securities issued by states of the United States and
  political subdivisions of the states.....................   $  15,750    $  15,750    $      --
</TABLE>
 
    Proceeds from sales of available-for-sale securities were approximately
$61.1 million, $27.3 million and $68.5 million in fiscal 1998, 1997 and 1996,
respectively. Gross realized gains on those sales were approximately $8,000,
$3,000 and $22,000 in fiscal 1998, 1997 and 1996, respectively. The Company used
specific identification as the cost basis in computing realized gains. Any
material net unrealized holding gain, net of applicable tax effect, on
available-for-sale securities has been included as a separate component of
stockholders' equity.
 
    REVENUE RECOGNITION AND PRODUCT WARRANTY.  Revenues from the Company's
products are generally recognized upon shipment. The Company provides for the
estimated costs of installation and warranty at the time revenue is recognized.
Maintenance and service revenues account for less than 10% of net sales and are
recognized as the related work is performed.
 
    MAJOR CUSTOMERS.  One customer accounted for approximately 20%, 10% and 11%
of net sales for each of fiscal years 1998, 1997 and 1996, respectively. Two
other customers each accounted for approximately 11% of net sales in fiscal
1997. There was one other customer in fiscal 1998 that accounted for
approximately 11% of net sales.
 
    SOFTWARE DEVELOPMENT COSTS.  SFAS No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed," requires the
capitalization of certain computer software development costs incurred after
technological feasibility is established. Amounts qualifying for capitalization
under the statement are immaterial and have not been capitalized to date.
 
    INVENTORIES.  Inventories are stated at the lower of cost (first-in,
first-out) or market and include material, labor and manufacturing costs.
Inventory is valued at currently adjusted standards which approximate actual
costs on a first-in, first-out basis.
 
    The Company provides inventory reserves for excess, obsolete, damaged or
lost inventory. The process of estimating required inventory reserves is
judgmental and is based on a number of factors which require input and
discussion among various members of management. Such factors include changes in
customer demand, changes in technology and other economic factors.
 
                                       38
<PAGE>
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                               SEPTEMBER 30, 1998
 
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
    Inventories consisted of the following (in thousands):
 
<TABLE>
<CAPTION>
                                                                             SEPTEMBER 30,
                                                                          --------------------
                                                                            1998       1997
                                                                          ---------  ---------
<S>                                                                       <C>        <C>
Raw materials...........................................................  $  12,547  $  13,919
Work-in-process.........................................................      2,254      6,809
Finished goods..........................................................      6,021      6,347
                                                                          ---------  ---------
                                                                          $  20,822  $  27,075
                                                                          ---------  ---------
                                                                          ---------  ---------
</TABLE>
 
    PROPERTY AND EQUIPMENT.  Property and equipment are stated at cost and are
generally depreciated over the estimated useful lives of the assets (four to ten
years) using the straight-line method. Leasehold improvements are amortized on a
straight-line basis over the shorter of the useful lives of the assets or the
remaining lease term. Assets acquired under capital leases are recorded at the
present value of the related lease obligations and amortized on a straight-line
basis over the related lease term.
 
    OTHER ACCRUED LIABILITIES.  Other accrued liabilities included the following
(in thousands):
 
<TABLE>
<CAPTION>
                                                                             SEPTEMBER 30,
                                                                          --------------------
                                                                            1998       1997
                                                                          ---------  ---------
<S>                                                                       <C>        <C>
Warranty................................................................  $   3,213  $   3,232
Sales commissions.......................................................        805      2,804
Employee compensation...................................................      3,744      3,236
Other...................................................................      3,661      3,614
                                                                          ---------  ---------
                                                                          $  11,423  $  12,886
                                                                          ---------  ---------
                                                                          ---------  ---------
</TABLE>
 
    NET INCOME (LOSS) PER SHARE.  Net income (loss) per share data has been
computed using the weighted average number of shares of common stock outstanding
for the Basic net income (loss) per share calculation, and using the weighted
average number of shares of common stock and common stock equivalent shares
calculated under the treasury stock method for the Diluted net income (loss) per
share calculation.
 
    FOREIGN CURRENCY TRANSLATION.  The functional currency of the Company's
foreign subsidiaries is the U.S. dollar. Accordingly, foreign translation and
exchange gains and losses, which have not been material, are reflected in the
accompanying consolidated statements of operations.
 
    CONCENTRATION OF CREDIT RISK.  Financial instruments that potentially
subject the Company to concentration of credit risk consist principally of
temporary cash investments and trade receivables. The Company has cash
investment policies that limit the amount of credit exposure to any one
financial institution evaluated as highly creditworthy. Concentration of credit
risk with respect to trade receivables exists because the Company's revenues are
derived primarily from the sale of photoresist removal equipment to companies in
the semiconductor industry. The Company performs ongoing credit evaluations of
its customers and generally does not require collateral.
 
    A write-off of accounts receivable was recorded in the third quarter of
fiscal 1997 for the uncollectible account receivable due from SubMicron
Technologies PLC in Thailand. The Company recorded a $4.5 million pre-tax charge
to cover the unpaid balance on accounts receivable, less the value of the
recovered equipment, which the Company has resold during fiscal 1998.
 
                                       39
<PAGE>
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                               SEPTEMBER 30, 1998
 
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
    RECLASSIFICATIONS.  Certain prior year amounts have been reclassified to
conform to the current year presentation.
 
    EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS.  In February 1997, the Financial
Accounting Standards Board issued SFAS No. 129, "Disclosure of Information about
Capital Structures," which will be adopted by the Company in the first quarter
of fiscal 1999. SFAS No.129 requires companies to disclose certain information
about their capital structure. The adoption of SFAS No. 129 is not anticipated
to have a material impact on the consolidated financial statement disclosures of
the Company.
 
    In June 1997, The Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income", and SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information" both of which will be adopted by the
Company in fiscal 1999. SFAS No. 130 requires companies to disclose certain
information regarding the nature and amounts of comprehensive income included in
the financial statements. SFAS No. 131 requires companies to disclose certain
information about operating segments within their business. The Company does not
anticipate that the adoption of SFAS No. 130, or SFAS No. 131, will have a
material impact on its consolidated financial statement disclosures.
 
3. GEOGRAPHIC AREA DATA:
 
    The Company's operations by geographical area for the three years ended
September 30, 1998 were as follows (in thousands):
 
<TABLE>
<CAPTION>
                                                         UNITED                 OTHER
                                                         STATES      JAPAN     FOREIGN   ELIMINATIONS  CONSOLIDATED
                                                       ----------  ---------  ---------  ------------  ------------
<S>                                                    <C>         <C>        <C>        <C>           <C>
1998
Net sales:
  Domestic...........................................  $   55,294  $   3,753  $   3,596   $       --    $   62,643
  Exports Europe.....................................      21,360         --         --           --        21,360
  Exports Asia/Pacific...............................      15,121      1,111         --           --        16,232
  Exports Japan......................................         195         --         --           --           195
  Intercompany.......................................       2,303      1,675      7,649      (11,627)           --
                                                       ----------  ---------  ---------  ------------  ------------
Total revenues.......................................  $   94,273  $   6,539  $  11,245   $  (11,627)   $  100,430
                                                       ----------  ---------  ---------  ------------  ------------
                                                       ----------  ---------  ---------  ------------  ------------
Operating income (loss)..............................  $  (10,728) $     378  $     755   $       (2)   $   (9,597)
Identifiable assets..................................  $   88,100  $   7,541  $   3,007   $   (1,432)   $   97,216
                                                       ----------  ---------  ---------  ------------  ------------
                                                       ----------  ---------  ---------  ------------  ------------
 
1997
Net sales:
  Domestic...........................................  $   54,899  $   7,829  $   3,280   $       --    $   66,008
  Exports Europe.....................................      16,998         --         --           --        16,998
  Exports Asia/Pacific...............................      35,557         --         --           --        35,557
  Exports Japan......................................       2,693         --         --           --         2,693
  Intercompany.......................................       1,916      1,155      7,046      (10,117)           --
                                                       ----------  ---------  ---------  ------------  ------------
Total revenues.......................................  $  112,063  $   8,984  $  10,326   $  (10,117)   $  121,256
                                                       ----------  ---------  ---------  ------------  ------------
                                                       ----------  ---------  ---------  ------------  ------------
Operating income.....................................  $       67  $   1,729  $     967   $       17    $    2,780
Identifiable assets..................................  $   95,003  $   8,273  $   2,302   $   (1,196)   $  104,382
                                                       ----------  ---------  ---------  ------------  ------------
                                                       ----------  ---------  ---------  ------------  ------------
</TABLE>
 
                                       40
<PAGE>
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                               SEPTEMBER 30, 1998
 
3. GEOGRAPHIC AREA DATA: (CONTINUED)
 
<TABLE>
<CAPTION>
                                                         UNITED                 OTHER
                                                         STATES      JAPAN     FOREIGN   ELIMINATIONS  CONSOLIDATED
                                                       ----------  ---------  ---------  ------------  ------------
1996
<S>                                                    <C>         <C>        <C>        <C>           <C>
Net sales:
  Domestic...........................................  $   58,967  $   7,904  $   1,791   $       --    $   68,662
  Exports Europe.....................................      23,788         --         --           --        23,788
  Exports Asia/Pacific...............................      30,554         --         --           --        30,554
  Exports Japan......................................       4,039         --         --           --         4,039
  Intercompany.......................................       1,212      1,496      4,744       (7,452)           --
                                                       ----------  ---------  ---------  ------------  ------------
Total revenues.......................................  $  118,560  $   9,400  $   6,535   $   (7,452)   $  127,043
                                                       ----------  ---------  ---------  ------------  ------------
                                                       ----------  ---------  ---------  ------------  ------------
Operating income (loss)..............................  $   12,037  $    (505) $     835   $        3    $   12,370
Identifiable assets..................................  $   86,458  $   9,250  $   1,935   $   (1,213)   $   96,430
                                                       ----------  ---------  ---------  ------------  ------------
                                                       ----------  ---------  ---------  ------------  ------------
</TABLE>
 
    The Company's operations are structured to achieve consolidated objectives.
As a result, significant interdependencies and overlaps exist among the
Company's operating units. Accordingly, the revenue, operating income (loss) and
identifiable assets shown for each geographic area may not be indicative of the
amounts that would have been reported if the operating units were independent of
one another.
 
    Intercompany sales between areas are accounted for based on established
intercompany sales prices.
 
    Operating income (loss) is revenue less related costs and direct and
allocated operating expenses, excluding interest and, for all areas except the
United States, the unallocated portion of corporate expenses. United States
operating income is net of corporate engineering and development and
administrative expenses.
 
    Corporate assets include assets maintained for general purposes, principally
cash equivalents and marketable securities.
 
4. CHARGES TAKEN DURING THE FISCAL YEAR
 
    The twelve month period ended September 30, 1998 included pre-tax charges of
approximately $1.7 million, related to costs of reductions in force completed in
June 1998 and September 1998 and costs of facility consolidations. As of
September 30, 1998, $946,000 of the $1.7 million has been paid and $754,000
remains on the Company's books as an accrual. Also included in the twelve month
period ended September 30, 1998 are pre-tax charges of approximately $4.0
million, related primarily to reserves for potential excess inventory and
accelerated write-downs of certain demonstration equipment.
 
                                       41
<PAGE>
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                               SEPTEMBER 30, 1998
 
5. RECONCILIATION OF EARNINGS AND SHARE AMOUNTS USED IN EPS CALCULATION
 
    Effective December 31, 1997, the Company adopted SFAS No. 128, "Earnings per
Share." Basic earnings (loss) per common share were computed by dividing net
income (loss) by the weighted average number of shares of common stock
outstanding during this period. Diluted earnings (loss) per common share for the
twelve months ended September 30, 1998, 1997 and 1996, were calculated using the
treasury stock method to compute the weighted average common stock outstanding.
As a result, the Company's reported earnings per share for fiscal years 1997 and
1996 were restated. There has been no impact on reported earnings per share
(EPS) data when compared to basic and diluted earnings per share calculated
under the provisions of SFAS No. 128 for the twelve month periods ended
September 30, 1997 and 1996 (in thousands, except per share data).
<TABLE>
<CAPTION>
                                                                                    FOR THE TWELVE MONTHS ENDED
                                                                                         SEPTEMBER 30, 1998
                                                                                ------------------------------------
                                                                                                          PER SHARE
                                                                                  LOSS        SHARES       AMOUNT
                                                                                ---------  ------------  -----------
<S>                                                                             <C>        <C>           <C>
Net loss......................................................................  $  (5,713)
 
BASIC AND DILUTED LOSS PER SHARE
Loss to common stockholders...................................................  $  (5,713)       14,039   $   (0.41)
 
<CAPTION>
 
                                                                                    FOR THE TWELVE MONTHS ENDED
                                                                                         SEPTEMBER 30, 1997
                                                                                ------------------------------------
                                                                                                          PER SHARE
                                                                                 INCOME       SHARES       AMOUNT
                                                                                ---------  ------------  -----------
<S>                                                                             <C>        <C>           <C>
Net income....................................................................  $   3,007
 
BASIC EARNINGS PER SHARE
Income available to common stockholders.......................................  $   3,007        13,635   $    0.22
 
Effect of dilutive securities:
Options issued to purchase Common stock.......................................                      574
 
DILUTIVE EARNINGS PER SHARE
Income available to common stockholders.......................................  $   3,007        14,209   $    0.21
<CAPTION>
 
                                                                                    FOR THE TWELVE MONTHS ENDED
                                                                                         SEPTEMBER 30, 1996
                                                                                ------------------------------------
                                                                                                          PER SHARE
                                                                                 INCOME       SHARES       AMOUNT
                                                                                ---------  ------------  -----------
<S>                                                                             <C>        <C>           <C>
Net income....................................................................  $   8,930
 
BASIC INCOME PER SHARE
Income available to common stockholders.......................................  $   8,930        13,350   $    0.67
 
Effect of dilutive securities:
Options issued to purchase Common stock.......................................                      292
 
DILUTIVE INCOME PER SHARE
Income available to common stockholders.......................................  $   8,930        13,642   $    0.65
</TABLE>
 
                                       42
<PAGE>
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                               SEPTEMBER 30, 1998
 
6. LINE OF CREDIT AGREEMENT AND CREDIT FACILITY:
 
    The Company has an unsecured $20,000,000 revolving line of credit agreement
(the "Agreement") with Union Bank which expires on March 31, 1999. There were no
borrowings outstanding under the Agreement as of September 30, 1998. Under the
line of credit, all borrowings bear interest at the bank's LIBOR rate plus 1.25%
per annum. The line of credit agreement contains certain covenants, including
covenants relating to financial ratios, profitability and tangible net worth
which must be maintained by the Company. The Company was not in compliance with
the line of credit profitability covenant as of June 30, 1998 as a result of the
Company's loss for the period. However, in July 1998 Union Bank waived the
Company's non-compliance for such period and amended the Loan Agreement to
provide for the payment by the Company of a commitment fee on the averaged
unused portion of the credit line for the preceding quarter in the amount of
 .15% per annum and to amend the profitability covenant to provide that the
Company may not incur a net loss exceeding $5.0 million through December 31,
1998. After such time, the Company must maintain a net profit to avoid violating
the covenant. The Company was in compliance with the financial covenants of the
amended Agreement as of September 30, 1998.
 
    Under the Agreement, the Company has a provision for foreign exchange
contracts of up to $1.0 million, and may also request standby letters of credit
not to exceed $500,000. As of September 30, 1998, there were letters of credit
outstanding in the amount of $69,163.
 
    The Company's wholly-owned subsidiary in Japan, GaSonics International
Japan, K.K. entered into an agreement with the Bank of Tokyo-Mitsubishi to
secure a credit facility to provide operating capital to fund operations. The
credit facility provides for borrowings up to a maximum of 300 million Japanese
yen (equivalent to approximately $2.1 million in U.S. dollars as of September
30, 1998), and is secured by a Letter of Guarantee issued by the Company. The
outstanding balance bears interest at 1.625% per annum and is due and payable on
demand. This credit facility expires on March 31, 1999. At September 30, 1998,
borrowings under this credit facility agreement were 296 million Japanese yen,
which is equivalent to approximately $2.1 million U.S. dollars as of that date.
The Company intends to enter into a new agreement or extend the term of the
existing credit facility prior to the due date; however, there can be assurance
that such financing will be available when required or, will be on reasonable
terms.
 
                                       43
<PAGE>
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                               SEPTEMBER 30, 1998
 
7. INCOME TAXES:
 
    The Company accounts for income taxes using an asset and liability approach.
 
    The provision (benefit) for income taxes consisted of the following (in
thousands):
 
<TABLE>
<CAPTION>
                                                                   YEARS ENDED SEPTEMBER 30,
                                                                -------------------------------
                                                                  1998       1997       1996
                                                                ---------  ---------  ---------
<S>                                                             <C>        <C>        <C>
CURRENT
  Federal.....................................................  $  (2,773) $   1,509  $   4,528
  State.......................................................        130        223        518
                                                                ---------  ---------  ---------
    Total current.............................................     (2,643)     1,732      5,046
                                                                ---------  ---------  ---------
 
DEFERRED
  Federal.....................................................       (149)       (98)      (211)
  State.......................................................        (22)       (15)       (27)
                                                                ---------  ---------  ---------
    Total deferred............................................       (171)      (113)      (238)
                                                                ---------  ---------  ---------
  Provision (benefit) for income taxes........................  $  (2,814) $   1,619  $   4,808
                                                                ---------  ---------  ---------
                                                                ---------  ---------  ---------
</TABLE>
 
    The provision (benefit) for income taxes differs from the amount computed by
applying the statutory Federal income tax rate, as follows:
 
<TABLE>
<CAPTION>
                                             YEARS ENDED SEPTEMBER 30,
                                          -------------------------------
                                            1998       1997       1996
                                          ---------  ---------  ---------
<S>                                       <C>        <C>        <C>
Statutory Federal tax rate..............      (35.0)%      35.0%      35.0%
State income taxes, net.................        0.0        3.6        4.0
Foreign operations......................        3.2        1.7       (1.8)
Research and development credit.........       (3.0)      (5.5)      (2.7)
Tax exempt income.......................       (3.1)      (4.6)      (2.0)
Other...................................        4.9        4.8        2.5
                                          ---------  ---------  ---------
  Provision (benefit) for income
    taxes...............................      (33.0)%      35.0%      35.0%
                                          ---------  ---------  ---------
                                          ---------  ---------  ---------
</TABLE>
 
    The major components of the net deferred tax asset are as follows (in
thousands):
 
<TABLE>
<CAPTION>
                                                                 SEPTEMBER 30,
                                                              --------------------
                                                                1998       1997
                                                              ---------  ---------
<S>                                                           <C>        <C>        <C>
Inventory reserves..........................................  $   3,268  $   2,833
Accrued warranty............................................      1,237      1,230
Deferred rent...............................................         87        155
Accrued vacation............................................        274        327
State tax carryovers........................................        512     --
Other temporary differences.................................       1189        825
                                                              ---------  ---------
Deferred tax asset..........................................      6,567      5,370
Deferred tax liabilities....................................       (870)      (502)
                                                              ---------  ---------
  Total net deferred tax asset..............................  $   5,697  $   4,868
                                                              ---------  ---------
                                                              ---------  ---------
</TABLE>
 
                                       44
<PAGE>
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                               SEPTEMBER 30, 1998
 
8. INVESTMENT IN IPEC
 
    During fiscal 1990, the Company and Integrated Process Equipment Corporation
(IPEC) entered into an agreement in which the Company received 294,600 shares of
IPEC Class A common stock in exchange for certain services and technology. In
fiscal 1997 and 1996, the Company sold 54,673 and 5,000 shares of IPEC common
stock, respectively, and realized after tax gains of $1,215,000 and $143,000,
respectively, which are reported in other income and (expense) in the
accompanying Consolidated Statements of Operations. As of September 30, 1997,
the Company held no shares of IPEC common stock.
 
9. COMMITMENTS:
 
    The Company leases its facilities and certain machinery and equipment under
operating lease agreements that expire at various dates through June 2005.
Minimum commitments under the non-cancelable leases as of September 30, 1998
were as follows (in thousands):
 
<TABLE>
<CAPTION>
FISCAL YEAR
-------------------------------------------------------------------------------------
<S>                                                                                    <C>
1999.................................................................................  $   1,974
2000.................................................................................        628
2001.................................................................................         54
2002.................................................................................         32
2003.................................................................................         32
Thereafter...........................................................................         64
                                                                                       ---------
                                                                                       $   2,784
                                                                                       ---------
                                                                                       ---------
</TABLE>
 
    Rent expense was approximately $2,263,000, $2,113,000 and $2,017,000 for the
years ended September 30, 1998, 1997 and 1996, respectively.
 
    The Company's lease agreement for one of its facilities provides for the
deferral of three months cash rental payments in fiscal 1990 and subsequent
scheduled rent increases. Rent expense under this agreement is being recognized
on a straight-line basis over the term of the lease. The difference between the
amounts paid and the amounts expensed is classified as deferred rent in the
accompanying Consolidated Balance Sheets.
 
    No new capital lease obligations were incurred in fiscal 1998 or 1997.
 
10. INCENTIVE STOCK OPTION PLANS AND STOCK PURCHASE PLAN:
 
    In November 1993, the Company's then President and Chief Executive Officer
(the "President") exercised options to purchase an aggregate of 566,665 shares
of common stock at $0.60 per share, with a 5% interest bearing promissory note
payable to the Company in the amount of $340,000. In January 1994, the Board of
Directors authorized a special bonus program for the President, pursuant to
which $100,000 of the principal of the promissory note would be forgiven upon
his completion of each calendar year of service to the Company from January 1,
1994 through January 1, 1997. Accordingly, the promissory note has been
amortized to compensation expense in the amounts of $65,000 for fiscal 1997 and
$100,000 in fiscal years 1996 and 1995, respectively. The promissory note was
fully amortized at September 30, 1997.
 
    1994 STOCK OPTION/STOCK ISSUANCE PLAN.  In fiscal 1994, the Board adopted,
and the stockholders subsequently approved, the 1994 Stock Option/Stock Issuance
Plan (the "1994 Stock Option Plan") and
 
                                       45
<PAGE>
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                               SEPTEMBER 30, 1998
 
10. INCENTIVE STOCK OPTION PLANS AND STOCK PURCHASE PLAN: (CONTINUED)
authorized a total of 1,450,000 shares for issuance under the Plan. The 1994
Stock Option Plan replaced the Company's 1985 Stock Option Plan and the
Company's 1988 Stock Option Plan which have both been terminated. During fiscal
years 1998, 1997 and 1996, the Company's Board of Directors authorized, and the
stockholders subsequently approved, an additional 400,000, 500,000 and 750,000
shares, respectively, for issuance under the Plan.
 
    The 1994 Stock Option Plan is divided into three separate components: (i)
the Discretionary Option Grant Program under which key employees (including
officers and directors) and consultants may, at the discretion of the Plan
Administrator, be granted options to purchase shares of common stock at an
exercise price not less than 85% of the fair market value of such shares on the
grant date, (ii) the Automatic Option Grant Program under which option grants
will automatically be made at periodic intervals to the nonemployee Board
members to purchase shares of common stock at an exercise price equal to 100% of
the fair market value of the option shares on the grant date, and (iii) the
Stock Issuance Program under which key employees (including officers and
directors) and consultants may be issued shares of common stock directly, either
through the purchase of such shares at a price not less than 85% of their fair
market value at the time of issuance or as a bonus tied to the performance of
services or the Company's attainment of financial objectives. In no event may
the aggregate number of shares of common stock for which any individual
participating in the 1994 Plan may be granted stock options and direct stock
issuances exceed 825,000 shares over the term of the Plan. Options granted under
the Discretionary and Automatic Option Grant Programs have a maximum term of ten
years and generally vest over periods of one to five years from the date of
grant, at the discretion of the Plan Administrator. There were no stock
issuances under the 1994 Stock Option Plan in fiscal years 1998, 1997 and 1996.
 
    In August 1996, holders of the Company's options were given the opportunity
to exchange previously granted stock options for new common stock options.
Option holders, excluding non-employee directors of the Company, who held an
outstanding stock option with an exercise price in excess of $7.25 per share
were granted a new option with an exercise price of $7.25 per share, the market
price of the common stock on that date, in exchange for his or her higher-priced
option. Each optionee was given the choice of accepting the new option with a
new four year vesting schedule and having the higher-priced option canceled or
rejecting the new option and retaining the higher-priced option with its
original vesting schedule. Under the terms of the new options, one-quarter of
the shares vest one year from the date of grant and the remaining shares vest in
36 monthly installments. Options to purchase 416,725 shares were so exchanged.
 
    In November 1998, holders of the Company's options were given the
opportunity to exchange previously granted stock options for new common stock
options. Option holders, excluding non-employee directors of the Company, who
held an outstanding stock option with an exercise price in excess of $5.625 per
share were granted a new option with an exercise price of $5.625 per share, the
market price of the common stock on that date, in exchange for his or her
higher-priced option. Each optionee was given the choice of accepting the new
option with a new four year vesting schedule and having the higher-priced option
canceled or rejecting the new option and retaining the higher-priced option with
its original vesting schedule. Under the terms of the new options, one-quarter
of the shares vest one year from the date of grant and the remaining shares vest
in 36 monthly installments. Options to purchase 960,131 shares were so
exchanged.
 
                                       46
<PAGE>
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                               SEPTEMBER 30, 1998
 
10. INCENTIVE STOCK OPTION PLANS AND STOCK PURCHASE PLAN: (CONTINUED)
    Option and stock issuance activity under the 1994 Stock Option Plan was as
follows:
 
<TABLE>
<CAPTION>
                                                                                     WEIGHTED
                                                             SHARES                   AVERAGE
                                                            AVAILABLE   NUMBER OF    EXERCISE
                                                            FOR GRANT     SHARES       PRICE
                                                           -----------  ----------  -----------
<S>                                                        <C>          <C>         <C>
Balance at September 30, 1995............................      350,983   1,055,750   $   10.52
  Additional options authorized..........................      750,000          --          --
  Granted................................................   (1,002,325)  1,002,325        8.63
  Exercised..............................................           --     (45,225)       7.55
  Canceled...............................................      505,580    (505,580)      13.43
                                                           -----------  ----------  -----------
Balance at September 30, 1996............................      604,238   1,507,270        8.37
  Additional options authorized..........................      500,000          --          --
  Granted................................................     (653,850)    653,850        9.82
  Exercised..............................................           --    (305,500)       8.04
  Canceled...............................................      349,559    (349,559)      10.83
                                                           -----------  ----------  -----------
Balance at September 30, 1997............................      799,947   1,506,061        8.50
  Additional options authorized..........................      400,000          --          --
  Granted................................................     (872,975)    872,975        9.27
  Exercised..............................................           --     (63,274)       7.83
  Canceled...............................................      221,973    (221,973)       9.04
                                                           -----------  ----------  -----------
Balance at September 30, 1998............................      548,945   2,093,789   $    9.08
                                                           -----------  ----------  -----------
                                                           -----------  ----------  -----------
</TABLE>
 
    As of September 30, 1998, options to purchase 641,918 are vested and
exercisable.
 
    The following table summarizes the options outstanding under the 1994 Stock
Option Plan as of September 30, 1998:
 
<TABLE>
<CAPTION>
                       OPTIONS OUTSTANDING                             EXERCISABLE OPTIONS
------------------------------------------------------------------  --------------------------
                      NUMBER         WEIGHTED                          NUMBER
                    OUTSTANDING       AVERAGE                        EXERCISABLE    WEIGHTED
                       AS OF         REMAINING        WEIGHTED          AS OF        AVERAGE
    RANGE OF       SEPTEMBER 30,    CONTRACTUAL        AVERAGE      SEPTEMBER 30,   EXERCISE
 EXERCISE PRICES       1998            LIFE        EXERCISE PRICE       1998          PRICE
-----------------  -------------  ---------------  ---------------  -------------  -----------
<S>                <C>            <C>              <C>              <C>            <C>
$   3.59-$ 7.00         355,825           9.63        $    6.88          12,249     $    6.88
    7.03-  7.20         163,500           6.24             7.17         102,750          7.20
    7.25-  7.25         504,102           7.88             7.25         253,800          7.25
    7.88-  8.67         108,094           7.29             8.41          50,126          8.52
    8.88-  8.88         304,942           8.60             8.88         104,345          8.88
    9.17- 10.75         429,250           9.21            10.57          37,749          9.22
   11.50- 23.00         228,076           8.26            15.75          80,899         17.55
-----------------  -------------           ---            -----     -------------       -----
$   3.59-$23.00       2,093,789           8.44        $    9.08         641,918     $    9.01
-----------------  -------------           ---            -----     -------------       -----
-----------------  -------------           ---            -----     -------------       -----
</TABLE>
 
    1994 EMPLOYEE STOCK PURCHASE PLAN.  The Company's 1994 Employee Stock
Purchase Plan (the "Purchase Plan") was adopted by the Board of Directors on
January 27, 1994 and approved by the stockholders in March 1994. The Purchase
Plan is designed to allow eligible employees of the Company to
 
                                       47
<PAGE>
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                               SEPTEMBER 30, 1998
 
10. INCENTIVE STOCK OPTION PLANS AND STOCK PURCHASE PLAN: (CONTINUED)
purchase shares of common stock, at semi-annual intervals, through their
periodic payroll deductions under the Purchase Plan. The Company had initially
reserved 300,000 shares of Common Stock for issuance under the Purchase Plan.
The Company's Board of Directors authorized, and the stockholders subsequently
approved, an additional 400,000 shares of Common Stock under the Purchase Plan
in each of fiscal years 1998, 1997 and 1996.
 
    Participants in the Purchase Plan may purchase shares at 85% of the lower of
(i) the fair market value of the common stock on the participant's entry date
into the offering period or (ii) the fair market value on the semi-annual
purchase date. The Purchase Plan will in all events terminate on December 31,
2003.
 
    Of the 1,100,000 shares reserved for the 1994 Employee Stock Purchase Plan,
654,482 shares were purchased as of September 30, 1998.
 
    STOCK BASED COMPENSATION EXPENSE.  In October 1995, the Financial Accounting
Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation,"
which establishes a fair value based method of accounting for stock-based
compensation plans and requires additional disclosures for those companies who
elect not to adopt the new method of accounting. The Company adopted SFAS No.
123 in fiscal 1997, and in accordance with the provisions of SFAS No. 123, the
Company applies APB Opinion 25 and related interpretations in accounting for its
stock option and stock purchase plans.
 
    The Company's stock plans, as described above, are accounted for under APB
Opinion No. 25. Because the FASB Statement No. 123 method of accounting has not
been applied to options granted prior to October 1, 1995, the resulting pro
forma compensation cost may not be representative of that to be expected in
future years. Had compensation cost for these plans been determined consistent
with Statement No. 123, the Company's consolidated net income and earnings per
share would have been reduced to the following pro forma amounts:
 
<TABLE>
<CAPTION>
                                                                                        1998       1997       1996
                                                                                      ---------  ---------  ---------
                                                                                              (IN THOUSANDS,
                                                                                          EXCEPT PER SHARE DATA)
<S>                                                                                   <C>        <C>        <C>
Net income (loss)--as reported......................................................  $  (5,713) $   3,007  $   8,930
Net income (loss)--pro forma........................................................  $  (7,682) $   1,325  $   7,615
Earnings (loss) per share--Basic--as reported.......................................  $   (0.41) $    0.22  $    0.67
Earnings (loss) per share--Diluted--as reported.....................................  $   (0.41) $    0.21  $    0.65
Earnings (loss) per share--Basic--pro forma.........................................  $   (0.55) $    0.10  $    0.57
Earnings (loss) per share--Diluted--pro forma.......................................  $   (0.55) $    0.09  $    0.56
</TABLE>
 
    The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions:
 
<TABLE>
<CAPTION>
                                                        1998          1997          1996
                                                    ------------  ------------  ------------
<S>                                                 <C>           <C>           <C>
Dividend yield....................................          0.0%          0.0%          0.0%
Expected life of options from vest date...........     0.9 years     0.9 years     0.9 years
Expected stock volatility.........................         84.3%         84.8%         84.8%
Risk-free interest rates..........................     4.3%-6.0%     5.6%-6.8%     5.4%-6.6%
</TABLE>
 
    The weighted average fair value of option grants using the Black-Scholes
option pricing model was $5.55, $5.91 and $5.07 for the fiscal years ended
September 30, 1998, 1997 and 1996, respectively.
 
                                       48
<PAGE>
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
To GaSonics International Corporation:
 
    We have audited the accompanying consolidated balance sheets of GaSonics
International Corporation (a Delaware Corporation) and subsidiaries as of
September 30, 1998 and 1997, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended September 30, 1998. These financial statements and the
schedules referred to below 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 GaSonics International
Corporation and subsidiaries as of September 30, 1998 and 1997, and the results
of their operations and cash flows for each of the three years in the period
ended September 30, 1998 in conformity with generally accepted accounting
principles.
 
    Our audit was made for the purpose of forming an opinion on the financial
statements taken as a whole. The schedule listed in the index under item
14(a)(2) is the responsibility of the Company's management and is presented for
purposes of complying with the Securities and Exchange Commission rules and is
not part of the basic financial statements. This schedule has been subjected to
the auditing procedures applied in the audit of the basic financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
 
ARTHUR ANDERSEN LLP
 
San Jose, California
October 30, 1998
 
                                       49
<PAGE>
                                    PART III
 
    Certain information required by Part III is omitted from this Report in that
the Registrant intends to file with the Commission a definitive proxy statement
within 120 days after the end of its fiscal year pursuant to Regulation 14A for
its Annual Meeting of Stockholders to be held March 4, 1999 (the "Proxy
Statement") and the information included therein is incorporated herein by
reference.
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
    The information concerning the Company's directors required by this Item is
incorporated by reference from the section captioned "Election of Directors" in
the Proxy Statement. The information required by this item relating to the
Company's executive officers is included under the caption "Executive Officers
of the Registrant" in Part I of this Report on Form 10-K. Information regarding
compliance with Section 16(a) of the Securities Exchange Act of 1934, as
amended, is incorporated by reference from the section captioned "Compliance
with Section 16(a) of the Exchange Act" in the proxy statement.
 
ITEM 11. EXECUTIVE COMPENSATION
 
    The information required by this Item is incorporated by reference from the
Proxy Statement under the caption "Executive Compensation and Related
Information".
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
    The information required by this Item is incorporated by reference from the
Proxy Statement under the caption "Election of Directors" and "Ownership of
Securities".
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
    The information required by this Item is incorporated by reference from the
Proxy Statement under the caption "Certain Transactions".
 
                                       50
<PAGE>
                                    PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
 
(a) The following documents are filed as part of this Report on Form 10-K:
 
    (1) Financial Statements
 
       The following consolidated financial statements of GaSonics International
       Corporation are included in Part II, Item 8:
 
<TABLE>
<CAPTION>
                                                                       PAGE
                                                                       NUMBER
                                                                       -----
    <S>                                                                <C>
                Consolidated Balance Sheets--September 30, 1998 and
                  1997                                                  33
 
                Consolidated Statements of Operations--Years Ended
                  September 30, 1998, 1997 and 1996                     34
 
                Consolidated Statements of Stockholders'
                  Equity--Years Ended September 30, 1998, 1997 and
                  1996                                                  35
 
                Consolidated Statements of Cash Flows--Years Ended
                  September 30, 1998, 1997 and 1996                     36
 
                Notes to Consolidated Financial Statements             37-48
 
                Report of Independent Public Accountants                49
</TABLE>
 
    (2) Financial Statement Schedules
 
<TABLE>
    <S>                                                                <C>
                Schedule II--Valuation and Qualifying Accounts          55
</TABLE>
 
       Schedules other than those listed above have been omitted since they are
       either not required, are not applicable, or the required information is
       shown in the financial statements or related notes.
 
    (3) Exhibits
 
       The following exhibits are referenced or included in this report:
 
<TABLE>
<CAPTION>
  EXHIBIT                                                 DESCRIPTION
-----------  -----------------------------------------------------------------------------------------------------
<C>          <S>
   2.1(1)    Form of Agreement and Plan of Merger between Gasonics International Corporation, a California
             corporation, and the Registrant
 
   2.2(1)    Stock Purchase Agreement dated February 28, 1991 between Emerson Electric Company and the Registrant
 
   2.3(5)    Asset Purchase Agreement dated as of July 30, 1995 among the Registrant, GaSonics International
             Japan, K.K., Tekisco, Inc. and Kishimoto Sangyo Co. Ltd.
 
   2.4(5)    Stock Purchase Agreement dated as of July 30, 1995 between the Registrant and Kishimoto Sangyo Co.
             Ltd.
 
   2.5(5)    Commission Agreement dated as of July 30, 1995 between the Registrant and Kishimoto Sangyo Co. Ltd.
 
   3.1(1)    Certificate of Incorporation of the Registrant
 
   3.2(1)    Bylaws of the Registrant
 
   3.3(10)   Amended and Restated Bylaws of the Registrant
 
   4.1(1)    Form of Common Stock Certificate
 
  10.1(1)    Form of Indemnification Agreement between the Company and each of its officers and directors
</TABLE>
 
                                       51
<PAGE>
<TABLE>
<CAPTION>
  EXHIBIT                                                 DESCRIPTION
-----------  -----------------------------------------------------------------------------------------------------
<C>          <S>
  10.2(13)   1994 Stock Option/Stock Issuance Plan and forms of agreements thereunder, as amended and restated
             effective April 17, 1998
 
  10.3(11)   1994 Employee Stock Purchase Plan, as amended and restated effective December 17, 1996
 
  10.4(1)    Form of Light Industrial Lease between Teachers Insurance and Annuity Association of America and the
             Registrant for office space at 2730 Junction Avenue, San Jose, California
 
  10.5(1)    Promissory Note dated November 10, 1993 in the principal amount of $339,999.60 issued by Dave Toole
             in favor of the Registrant
 
  10.6(1)    Credit Agreement dated August 6, 1993 between Union Bank, International Plasma Corporation and the
             Registrant
 
  10.7(2)    Business Loan Agreement dated April 28, 1994 between Registrant and Union Bank and related Promissory
             Note
 
  10.8(3)    Lease Agreement dated November 14, 1994 between Registrant and Realtech Properties I, L.P.
 
  10.9(4)    Loan Agreement dated April 19, 1995 between Registrant and Union Bank, a California banking
             corporation
 
  10.10(4)   Lease Agreement dated June 5, 1995 between Registrant and Orchard Investment Company
 
  10.11(6)   Underwriting Agreement dated March 21, 1994 by and among the Registrant, the underwriters named
             therein and the selling stockholders named therein
 
  10.12(7)   Underwriting Agreement dated March 9, 1995 by and among the Registrant, the underwriters named
             therein and the selling stockholders named therein
 
  10.13(8)   Continuing Guarantee Agreement dated July 31, 1995, executed by the Registrant in favor of the Bank
             of Tokyo, Ltd.
 
  10.14(12)  Loan Agreement dated May 1, 1997 between Registrant and Bank of Tokyo--Mitsubishi
 
  10.15(13)  Loan Agreement dated March 23, 1998 between Registrant and Union Bank
 
  10.16(13)  Asuri Raghaven Employment Agreement
 
  10.17(14)  Amendment to Loan Agreement dated March 23, 1998 between Registrant and Union Bank
 
  16.1(1)    Letter from Ernst & Young dated March 8, 1994 regarding the change in the Certifying Accountant of
             the Registrant
 
  21.1       List of Subsidiaries of the Registrant
 
  23.1       Consent of Independent Public Accountants
 
  24.1       Power of Attorney (Included on signature page)
 
  27         Financial Data Schedule
</TABLE>
 
------------------------
 
 (1) Incorporated by reference to identically numbered exhibits included in
     Registrant's Registration Statement on Form S-1 (File No. 33-74872)
     declared effective with the Securities and Exchange Commission on March 21,
     1994.
 
 (2) Incorporated by reference to identically numbered exhibit included in
     Registrant's Report on Form 10-Q for the quarter ended June 30, 1994.
 
 (3) Incorporated by reference to an exhibit in Registrant's Report on Form 10-Q
     for the quarter ended December 31, 1994.
 
                                       52
<PAGE>
 (4) Incorporated by reference to exhibits included in Registrant's Report on
     Form 10-Q for the quarter ended June 30, 1995.
 
 (5) Incorporated by reference to exhibits filed with Registrant's Current
     Report on Form 8-K filed with the Securities and Exchange Commission on
     August 24, 1995.
 
 (6) Incorporated by reference to an exhibit in Registrant's Registration
     Statement on Form S-1 (File No. 33-74872) declared effective with the
     Securities and Exchange Commission on March 21, 1994.
 
 (7) Incorporated by reference to an exhibit in Registrant's Registration
     Statement on Form S-1 (File No. 33-89636) declared effective with the
     Securities and Exchange Commission on March 9, 1995.
 
 (8) Incorporated by reference to exhibits filed with the Registrant's Annual
     Report on Form 10-K for the year ended September 30, 1995.
 
 (9) Incorporated by reference to an exhibit included in Registrant's Report on
     Form 10-Q for the quarter ended March 31, 1996.
 
(10) Incorporated by reference to exhibits filed with the Registrant's Annual
     Report on Form 10-K for the year ended September 30, 1996
 
(11) Incorporated by reference to an exhibit included in Registrant's Report on
     Form 10-Q for the quarter ended March 31, 1997
 
(12) Incorporated by reference to an exhibit included in Registrant's Report on
     Form 10-Q for the quarter ended June 30, 1997
 
(13) Incorporated by reference to an exhibit included in Registrant's Report on
     Form 10-Q for the quarter ended March 31, 1998
 
(14) Incorporated by reference to an exhibit included in Registrant's Report on
     Form 10-Q for the quarter ended June 30, 1998
 
(b) Reports on Form 8-K.
 
    No reports on Form 8-K were filed during the fourth quarter ended September
    30, 1998.
 
(c) Exhibits. See list of exhibits under (a) (3) above.
 
(d) Financial Statement Schedules. See list of schedules under (a) (2) above
 
                                       53
<PAGE>
                                   SIGNATURES
 
    Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
 
<TABLE>
<S>                             <C>  <C>
Date: December 18, 1998         GASONICS INTERNATIONAL CORPORATION
 
                                By:              /s/ ASURI RAGHAVAN
                                     -----------------------------------------
                                                   Asuri Raghavan
                                        PRESIDENT & CHIEF EXECUTIVE OFFICER
</TABLE>
 
                               POWER OF ATTORNEY
 
    KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints David Toole and Asuri Raghavan, jointly and
severally, his attorneys-in-fact, each with the power of substitution, for him
in any and all capacities, to sign any amendments to the Report on Form 10-K and
to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorney-in-fact, or his substitute or
substitutes, may do or cause to be done by virtue hereof.
 
    Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated below:
 
<TABLE>
<CAPTION>
          SIGNATURE                       TITLE                    DATE
------------------------------  --------------------------  -------------------
<C>                             <S>                         <C>
        /s/ DAVE TOOLE
------------------------------  Chairman of the Board of     December 18, 1998
          Dave Toole              Directors
 
      /s/ MONTE M. TOOLE
------------------------------  Vice Chairman of the Board   December 18, 1998
        Monte M. Toole            of Directors
 
                                Chief Executive Officer,
      /s/ ASURI RAGHAVAN          President and Director
------------------------------    (Principal Executive       December 18, 1998
        Asuri Raghavan            Officer)
 
                                Vice President, Finance
     /s/ TERRY R. GIBSON          and
------------------------------    Chief Financial Officer    December 18, 1998
       Terry R. Gibson            (Principal Financial and
                                  Accounting Officer)
 
   /s/ KENNETH L. SCHROEDER
------------------------------  Director                     December 18, 1998
     Kenneth L. Schroeder
 
  /s/ F. JOSEPH VAN POPPELEN
------------------------------  Director                     December 18, 1998
    F. Joseph Van Poppelen
 
   /s/ KENNETH M. THOMPSON
------------------------------  Director                     December 18, 1998
     Kenneth M. Thompson
</TABLE>
 
                                       54
<PAGE>
                                                                     SCHEDULE II
 
                       GASONICS INTERNATIONAL CORPORATION
                       VALUATION AND QUALIFYING ACCOUNTS
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                      BALANCE AT    CHARGED TO   CHARGED TO                BALANCE AT
                                                     BEGINNING OF    COSTS AND      OTHER                    END OF
DESCRIPTIONS                                            PERIOD       EXPENSES     ACCOUNTS    DEDUCTIONS     PERIOD
---------------------------------------------------  -------------  -----------  -----------  -----------  -----------
<S>                                                  <C>            <C>          <C>          <C>          <C>
Allowance for Doubtful Accounts
  Years ended September 30,:
    1996...........................................    $     369     $     240    $       2    $      --    $     611
    1997...........................................    $     611     $   4,637    $   2,645    $   7,173    $     720
    1998...........................................    $     720     $     120    $      --    $      --    $     840
Inventory Reserves
  Years ended September 30,:
    1996...........................................    $   1,562     $   2,266    $      --    $   1,593    $   2,235
    1997...........................................    $   2,235     $   1,725    $      --    $   1,138    $   2,822
    1998...........................................    $   2,822     $   3,352    $      --    $   1,752    $   4,422
</TABLE>
 
                                       55