assurance that revenue from future products or enhancements will be sufficient to recover the development costs associated with such products or enhancements, or that we will be able to secure the financial resources necessary to fund future development. Research and development costs are typically incurred before we confirm the technical feasibility and commercial viability of a product, and not all development activities result in commercially viable products. In addition, we cannot ensure that products or enhancements will receive market acceptance, or that we will be able to sell these products at prices that are favorable to us. Our business could be seriously harmed if we are unable to sell our products at favorable prices, or if our products are not accepted by the markets in which we operate.

If third parties violate our proprietary rights, in which we have made significant investments, such events could result in a loss of value of some of our intellectual property or costly litigation.

Our success is dependent in part on our technology and other proprietary rights. We own various United States and international patents and have additional pending patent applications relating to some of our products and technologies. The process of seeking patent protection is lengthy and expensive, and we cannot be certain that pending or future applications will actually result in issued patents, or that issued patents will be of sufficient scope or strength to provide meaningful protection or commercial advantage to us. Other companies and individuals, including our larger competitors, may develop technologies that are similar or superior to our technology or design around the patents we own or license. We also maintain trademarks on certain of our products and claim copyright protection for certain proprietary software and documentation. However, we can give no assurance that our trademarks and copyrights will be upheld or successfully deter infringement by third parties. Recently, the patent covering technology that we license and use in our manufacture of insert carriers has expired, which may have the effect of diminishing or eliminating any competitive advantage we may have with respect to this manufacturing process.

While patent, copyright and trademark protection for our intellectual property is important, we believe our future success in highly dynamic markets is most dependent upon the technical competence and creative skills of our personnel. We attempt to protect our trade secrets and other proprietary information through confidentiality agreements with our customers, suppliers, employees and consultants and through other security measures. We also maintain exclusive and non-exclusive licenses with third parties for the technology used in certain products. However, these employees, consultants and third parties may breach these agreements, and we may not have adequate remedies for wrongdoing. In addition, the laws of certain territories in which we develop, manufacture or sell our products may not protect our intellectual property rights to the same extent as do the laws of the United States.

We may face intellectual property infringement claims that could be time-consuming and costly to defend and could result in our loss of significant rights and the assessment of treble damages.

From time to time, we have received communications from other parties asserting the existence of patent rights or other intellectual property rights that they believe cover certain of our products, processes, technologies or information. In such cases, we evaluate our position and consider the available alternatives, which may include seeking licenses to use the technology in question on commercially reasonable terms or defending our position. We cannot ensure that licenses can be obtained, or if obtained will be on acceptable terms, or that litigation or other administrative proceedings will not occur.

Some of these claims may lead to litigation. We cannot assure you that we will prevail in these actions, or that other actions alleging misappropriation or misuse by us of third-party trade secrets, infringement by us of third-party patents and trademarks or the validity of our patents, will not be asserted or prosecuted against us. Intellectual property litigation, regardless of outcome, is expensive and time-consuming, could divert management’s attention from our business and have a material negative effect on our business, operating results or financial condition. If there is a successful claim of infringement against us, we may be required to pay substantial damages (including treble damages if we were to be found to have willfully infringed a third party’s patent) to the party claiming infringement, develop non-infringing technology, stop selling or using technology that contains the allegedly infringing intellectual property or enter into royalty or license agreements that may not be available on acceptable or commercially practical terms, if at all. Our failure to develop non-infringing technologies or license the proprietary rights on a timely basis could harm our business. Parties making infringement claims on future issued patents may be able to obtain an injunction that would prevent us from selling or using our technology that contains the allegedly infringing intellectual property, which could harm our business.

19

Our reliance on sales to a few major customers and granting credit to those customers places us at financial risk.

We currently sell to a relatively small number of customers, and we expect our operating results will likely continue to depend on sales to a relatively small number of customers for the foreseeable future, as well as the ability of these customers to sell products that require our products in their manufacture. During fiscal 2007 we had one customer that individually represented 13%, of revenue. Many of our customer relationships have been developed over a short period of time and certain customers are in their preliminary stages of development. The loss of sales to any of these customers would have a significant negative impact on our business. Our agreements with these customers may be cancelled if we fail to meet certain product specifications, materially breach the agreement or in the event of bankruptcy, and our customers may seek to renegotiate the terms of current agreements or renewals. We cannot be certain that these customers will generate significant revenue for us in the future nor that these customer relationships will continue to develop. If our relationships with our other customers do not continue to develop, we may not be able to expand our customer base or maintain or increase our revenue.

As of September 30, 2007, accounts receivable from three customers each exceeded 10% of accounts receivable; these three customers accounted for 10%, 13% and 22% of total accounts receivable, respectively. A concentration of our receivables from one or a small number of customers places us at risk. If any one or more of our major customers does not pay us it could adversely affect our financial position and results of operations. We attempt to manage this credit risk by performing credit checks, by requiring significant partial payments prior to shipment where appropriate and by actively monitoring collections. We also require letters of credit of certain customers depending on the size of the order, type of customer or its creditworthiness and its country of domicile.

If any of our customers cancels or fails to accept a large system order, our financial position and results of operations could be materially and adversely affected.

Our backlog includes orders for large systems, such as our diffusion furnaces, with system prices of up to and in excess of $1.0 million depending on the system configuration, options included and any special requirements of the customer. Because our orders are typically subject to cancellation or delay by the customer, our backlog at any particular point in time is not necessarily representative of actual sales for succeeding periods, nor is backlog any assurance that we will realize revenue or profit from completing these orders. Our financial position and results of operations could be materially and adversely affected should any large systems order be cancelled prior to shipment, or not be accepted by the customer. We have experienced significant cancellations in the past, including $1.2 million in fiscal 1999, $3.5 million in 2001, and $1.2 million in 2002. We have not experienced any significant cancellations since 2002. Likewise, a significant change in the liquidity or financial position of any of our customers that purchase large systems could have a material impact on the collectibility of our accounts receivable and our future operating results. Our backlog does not provide any assurance that we will realize revenue or profit from those orders or indicate in which period net revenue will be recognized, if ever.

Our business might be adversely affected by a decline in our sales to foreign customers.

During fiscal 2006, 65% of our net revenue came from customers outside of North America. During fiscal 2007, 72% of our net revenue came from customers outside of North America as follows:

• Asia (including Korea, People’s Republic of China, Taiwan, Japan, Singapore, Malaysia, Australia and India) – 52% (includes 18% to China and 18% to Taiwan); and
   
• Europe – 20%.

Because of our significant dependence on revenue from international customers, our operating results could be negatively affected by a decline in the economies of any of the countries or regions in which we do business. Each region in the global semiconductor equipment market exhibits unique characteristics that can cause capital equipment investment patterns to vary significantly from period to period. Periodic local or international economic downturns, trade balance issues, political instability and fluctuations in interest and currency exchange rates could negatively affect our business and results of operations.

We recorded foreign currency transaction losses of $0.01 million during fiscal 2007, losses of $0.1 million in 2006, and gains of $0.1 million in 2005. While our business has not been materially affected in the past by currency fluctuations, there is a risk that it may be materially adversely affected in the future. Such risk includes possible losses due to currency exchange rate fluctuations, possible future prohibitions against repatriation of earnings, or proceeds

20

from disposition of investments, and from possible social and military instability in the case of India, South Korea, Taiwan and possibly elsewhere. Our wholly-owned subsidiary, Tempress Systems, has conducted its operations in The Netherlands since 1995 and during 2005 we established a subsidiary in Germany to conduct the European sales of our Bruce Technologies product line. In October 2007 we completed our acquisition of R2D, a French company. As a result, such operations are subject to the taxation policies, employment and labor laws, transportation regulations, import and export regulations and tariffs, possible foreign exchange restrictions, international monetary fluctuations, and other political, economic and legal policies of that nation, the European Economic Union and the other European nations in which it conducts business. Consequently, we might encounter unforeseen or unfamiliar difficulties in conducting our European operations. Changes in such laws and regulations may have a material adverse effect on our revenue and costs.

If our critical suppliers fail to deliver sufficient quantities of quality product in a timely and cost-effective manner, it could negatively affect our business.

We use a wide range of materials and services in the production of our products including custom electronic and mechanical components, and we use numerous suppliers of materials. We generally do not have guaranteed supply arrangements with our suppliers. Because of the variability and uniqueness of customer orders, we try to avoid maintaining an extensive inventory of materials for manufacturing. Key suppliers include two steel mills capable of producing the types of steel to the tolerances needed for our wafer carriers, an injection molder that molds plastic inserts into our steel carriers, an adhesive manufacturer that supplies the critical glue used in the production of the semiconductor polishing templates and a pad supplier that produces a unique material used to attach semiconductor wafers to the polishing template. We also rely on third parties for certain machined parts, steel frames and metal panels and other components used particularly in the assembly of semiconductor production equipment.

Although we make what we believe are reasonable efforts to ensure that parts are available from multiple suppliers, this is not always practical or even possible; accordingly, some key parts are being procured from a single supplier or a limited group of suppliers. During the semiconductor industry peak years, increases in demand for capital equipment resulted in longer lead-times for many important system components. Future increases in demand could cause delays in meeting shipments to our customers. Because the selling price of some of our systems exceeds $1.0 million, the delay in the shipment of even a single system could cause significant variations in our quarterly revenue. There can be no assurance that our financial position and results of operations will not be materially and adversely affected if, in the future, we do not receive in a timely and cost-effective manner a sufficient quantity and quality of parts to meet our production requirements.

The solar power industry is currently experiencing an industry-wide shortage of polysilicon. This shortage poses several risks to our business, including possible constraints on revenue growth and possible decreases in our gross margins and profitability.

Many of our customers are solar cell manufacturers. Polysilicon is an essential raw material in the production of solar cells. There is currently an industry-wide shortage of polysilicon, which has resulted in significant price increases. We expect that the average spot price of polysilicon will continue to increase and we expect that polysilicon demand will continue to outstrip supply throughout 2007 and potentially for a longer period. The inability of our solar industry customers to obtain sufficient polysilicon at commercially reasonable prices, or at all, would adversely affect future customer demand for our products and could cause us to make fewer shipments and generate lower than anticipated revenue, thereby seriously harming our business, financial condition and results of operations.

We might require additional financing to expand our operations.

We believe that current cash balances, our existing line of credit, cash flows generated from our operations and additional available financing will provide adequate working capital for at least the next twelve months. However, we may require additional financing for further implementation of our growth plans. There is no assurance that any additional financing will be available if and when required, or, even if available, that it would not materially dilute the ownership percentage of the then existing shareholders, result in increased expenses or result in covenants or special rights that would restrict our operations.

21

We are exposed to risks from legislation requiring companies to evaluate their internal control over financial reporting.

Section 404 of the Sarbanes-Oxley Act of 2002 will require our management to report on the effectiveness of our internal control over financial reporting beginning in fiscal 2008. Our independent registered public accounting firm will be required to attest to the effectiveness of our internal control over financial reporting beginning in fiscal 2008. We have an ongoing program to perform the system and process evaluation and testing necessary to comply with these requirements. We expect to incur increased expense and to devote additional management resources to Section 404 compliance. In the event our chief executive officer, chief financial officer or independent registered public accounting firm determine that our internal control over financial reporting is not effective as defined under Section 404, investor perceptions of our company may be adversely affected and could cause a decline in the market price of our stock.

Terrorist attacks and threats or actual war may negatively impact all aspects of our operations, revenue, costs and stock price.

The 2001 terrorist attacks in the United States, as well as events occurring in response or connection to them, including future terrorist attacks against United States’ targets, rumors or threats of war, actual conflicts involving the United States or its allies or military or trade disruptions impacting our domestic or foreign suppliers of parts, components and subassemblies, may impact our operations, including, among other things, by causing delays or losses in the delivery of supplies or finished goods and decreased sales of our products. More generally, any of these events could cause consumer confidence and spending to decrease or result in increased volatility in the United States and worldwide financial markets and economy. They could also result in economic recession in the United States or abroad. Any of these occurrences could have a significant adverse impact on our financial position and results of operations.

We face the risk of product liability claims or other litigation, which could be expensive and divert management from running our business.

The manufacture and sale of our products, which in operation involve toxic materials, involve the risk of product liability claims. In addition, a failure of one of our products at a customer site could interrupt the business operations of our customer. Our existing insurance coverage limits may not be adequate to protect us from all liabilities that we might incur in connection with the manufacture and sale of our products if a successful product liability claim or series of product liability claims were brought against us. We may also be involved in other legal proceedings or claims and experience threats of legal action from time to time in the ordinary course of our business.

Where appropriate, we intend to vigorously defend all claims. However, any actual or threatened claims, even if not meritorious or material, could result in the expenditure of significant financial and managerial resources. The continued defense of these claims and other types of lawsuits could divert management’s attention away from running our business. In addition, required amounts to be paid in settlement of any claims, and the legal fees and other costs associated with such settlement, cannot be estimated and could, individually or in the aggregate, materially harm our financial condition.

We are subject to environmental regulations, and our inability or failure to comply with these regulations could result in significant costs or the suspension of our ability to operate segments of our business.

We are subject to environmental regulations in connection with our business operations, including regulations related to manufacturing and our customers’ use of our products. From time to time, we receive notices regarding these regulations. It is our policy to respond promptly to these notices and to take any necessary corrective action. Our failure or inability to comply with existing or future environmental regulations could result in significant remediation liabilities, the imposition of fines and/or the suspension or termination of development, manufacturing or use of certain of our products, each of which could damage our financial position and results of operations.

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ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

We believe that our properties are adequate for our current needs. In addition, we believe that adequate space can be obtained to meet our foreseeable business needs. The following chart identifies the principal properties which we own or lease.

							Monthly			Lease
Location		Use		Size			Rent			Expiration
Semiconductor Equipment Segment
Tempe, AZ		Corporate		15,000 sf			$	9,000		11/30/2007	(3)
Austin, TX		Mfg Support				(1)			(1)		(1)
Billerica, MA		Office, Warehouse & Mfg.		30,000 sf			$	18,000		8/31/2011
Heerde, The Netherlands		Office & Mfg.		10,000 sf				Owned		N/A
Heerde, The Netherlands		Warehouse & Mfg.		10,000 sf			$	9,000		7/31/2008
Vaassen, The Netherlands		Warehouse & Mfg.		48,000 sf				Owned		N/A
Clapiers, France		Office, Warehouse & Mfg.		12,000 sf			$	7,000		9/30/2016	(4)
Clapiers, France		Manufacturing		3,000 sf			$	3,000			(3)
Le Crès, France		Manufacturing		3,000 sf			$	2,000			(3)
Polishing Supplies Segment
Carlisle, PA		Office & Mfg.		22,000 sf			$	12,000		6/30/2008	(2)

____________________

(1)		Services are performed in customer’s facilities.
(2)		We have an option to renew for three additional terms of one year each. We intend to exercise our renewal options.
(3)		We are currently leasing this property on a month to month basis.
(4)		This lease can be cancelled by the Company with six months notice beginning October 1, 2010.

ITEM 3. LEGAL PROCEEDINGS

None.

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

None.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

MARKET INFORMATION

Our common stock, par value $0.01 per share (“Common Stock”), began trading on the NASDAQ Global Market (formerly the NASDAQ National Market), under the symbol “ASYS,” on April 18, 2001. From 1983 to 2001, our Common Stock was traded on the NASDAQ SmallCap Market. On December 7, 2007, the closing price of our Common Stock as reported on the NASDAQ Global Market was $15.07 per share. The following table sets forth the high and low bid price at which the shares of our Common Stock traded for each quarter of fiscal 2007 and 2006, as reported by the NASDAQ Global Market.

	Fiscal 2007						Fiscal 2006
	High			Low			High			Low
First quarter	$	8.00		$	5.95		$	9.05		$	5.22
Second quarter		8.10			6.65			10.31			6.26
Third quarter		9.21			7.25			10.02			6.05
Fourth quarter		14.26			8.48			7.44			6.25

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COMPARISON OF STOCK PERFORMANCE

The following line graph compares cumulative total shareholder return, assuming reinvestment of dividends, for: the Company’s Common Stock, the NASDAQ Composite Index and the NASDAQ Industrial Index. Because the Company did not pay dividends on its Common Stock during the measurement period, the calculation of the cumulative total shareholder return on the Company’s Common Stock did not include dividends. The following graph assumes that $100 was invested on October 1, 2002.

HOLDERS

As of December 6, 2007, there were 909 shareholders of record of our Common Stock. Based upon a recent survey of brokers, we estimate there were approximately an additional 2,742 beneficial shareholders who held shares in brokerage or other investment accounts as of that date.

DIVIDENDS

We have never paid dividends on our Common Stock. Our present policy is to apply cash to investment in product development, acquisition or expansion; consequently, we do not expect to pay dividends on Common Stock in the foreseeable future.

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SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

The following table sets forth certain information, as of September 30, 2007, concerning outstanding options and rights to purchase Common Stock granted to participants in all of the Company’s equity compensation plans and the number of shares of Common Stock remaining available for issuance under such equity compensation plans.

								Number of securities
								remaining available for
		Number of securities to				Weighted-average		future issuance under
		be issued upon exercise				exercise price of		equity compensation plans
		of outstanding options,				outstanding options,		(excluding securities reflected
		warrants and rights				warrants and rights		in column (a))
		(a)				(b)		(c)
Plan Category
Equity compensation plans approved by
security holders (1)			450,303			6.44			590,787
Equity compensation plans not approved
by security holders			—						—
Total			450,303						590,787

____________________

(1)

Represents the 1998 Employee Stock Option Plan, the 2007 Employee Stock Incentive Plan and the Non-Employee Director Stock Option Plan and any respective amendments thereto.

ITEM 6. SELECTED FINANCIAL DATA

This selected financial data should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements (including the related notes thereto) contained elsewhere in this report.

	Years Ended September 30,
	2007				2006				2005				2004(1)				2003
	(In thousands, except percentages, per share amounts
	and number of employees)
Operating Data:
Net revenue	$	45,984			$	40,445			$	27,899			$	19,299			$	19,434
Gross profit	$	12,810			$	10,575			$	7,668			$	3,949			$	4,835
Gross profit %		27.9	%			26.1	%			27.5	%			20.5	%			24.9	%
Operating income (loss)	$	1,741			$	1,635			$	(244	)		$	(2,035	)		$	(245	)
Net income (loss)	$	2,417			$	1,318			$	(259	)		$	(3,165	)		$	(100	)
Dividends on convertible preferred stock	$	—			$	(81	)		$	(76	)		$	—			$	—
Net income (loss) attributable to common	$	2,417			$	1,237			$	(335	)		$	(3,165	)		$	(100	)
Earnings (loss) per share:
Basic earnings (loss) per share	$	0.45			$	0.40			$	(0.12	)		$	(1.17	)		$	(0.04	)
Diluted earnings (loss) per share	$	0.44			$	0.38			$	(0.12	)		$	(1.17	)		$	(0.04	)
Order backlog(2)	$	23,156			$	13,600			$	14,388			$	7,300			$	7,645
Balance Sheet Data:
Cash and cash equivalents	$	18,370			$	6,433			$	3,309			$	1,674			$	7,453
Working capital	$	30,492			$	11,883			$	9,968			$	7,735			$	12,727
Current ratio		3.6:1				2.6:1				3.7:1				2.7:1				4.9:1
Total assets	$	50,666			$	23,563			$	17,701			$	16,660			$	18,399
Total current liabilities	$	11,718			$	7,337			$	3,752			$	4,531			$	3,259
Long-term obligations	$	744			$	617			$	741			$	474			$	641
Convertible preferred stock	$	—			$	—			$	1,935			$	—			$	—
Total stockholders’ equity	$	38,204			$	15,609			$	13,208			$	11,655			$	14,499

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____________________

(1)		On July 1, 2004, the Company acquired the Bruce Technologies horizontal furnace product line from Kokusai.
(2)		The backlog as of September 30, 2007, 2006, 2005, 2004 and 2003 includes $0.9 million, $0.9 million, $1.0 million, $0.7 million and $0.7 million, respectively, of open orders or deferred revenue on which we anticipate no gross margin.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and the related notes included in Item 8, “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K. This discussion contains forward-looking statements, which involve risk and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of certain factors including, but not limited to, those discussed in “Risk Factors” and elsewhere in this Annual Report on Form 10-K.

Introduction

Management’s Discussion and Analysis (“MD&A”) is intended to facilitate an understanding of our business and results of operations. MD&A consists of the following sections:

• Overview: a summary of our business.

• Results of Operations: a discussion of operating results.

• Liquidity and Capital Resources: an analysis of cash flows, sources and uses of cash and financial position.

• Contractual Obligations and Commercial Commitments

• Critical Accounting Policies: a discussion of critical accounting policies that require the exercise of judgments and estimates.

• Impact of Recently Issued Accounting Pronouncements: a discussion of how we are affected by recent pronouncements.

Overview

We operate in two segments: semiconductor and solar equipment and polishing supplies. Our semiconductor and solar equipment segment is a leading supplier of thermal processing systems, including related automation, parts and services, to the semiconductor, solar/photovoltaic, silicon wafer and MEMS industries.

Our polishing supplies and equipment segment is a leading supplier of wafer carriers to manufacturers of silicon wafers. The polishing segment also manufacturers polishing templates, steel carriers and double-sided polishing and lapping machines to fabricators of optics, quartz, ceramics and metal parts, and to manufacturers of medical equipment components.

Our customers are primarily manufacturers of integrated circuits and solar cells. The semiconductor and solar cell industries are cyclical and historically have experienced significant fluctuations. Our revenue is impacted by these broad industry trends.

In June 2006, we adopted a plan to consolidate the manufacturing of our automation product line into facilities already used to manufacture diffusion furnaces. Our automation products are often sold in conjunction with new diffusion furnaces. As a result of this decision, we recorded approximately $0.2 million of restructuring charges in fiscal 2006.

In July 2004, we completed the acquisition of the Bruce Technologies horizontal diffusion furnace product line from Kokusai Semiconductor Equipment Corporation , which we believe makes us a leading manufacturer of horizontal diffusion furnaces.

26

Results of Operations

The following table sets forth certain operational data as a percentage of net revenue for the periods indicated:

		Years Ended September 30,
		2007			2006			2005
Net revenue			100.0	%		100.0	%		100.0	%
Cost of sales			72.1	%		73.9	%		72.5	%
Gross margin			27.9	%		26.1	%		27.5	%
Selling, general and administrative			22.9	%		20.5	%		26.2	%
Restucturing charge			—			0.5	%		—
Research and development			1.2	%		1.1	%		2.2	%
Operating income (loss)			3.8	%		4.0	%		(0.9	)%
Interest and other income (expense), net			0.7	%		—			0.3	%
Income (loss) before income taxes			4.5	%		4.0	%		(0.6	)%
Income tax provision (benefit)			(0.8	)%		0.7	%		0.3	%
Net income (loss)			5.3	%		3.3	%		(0.9	)%

Fiscal 2007 compared to Fiscal 2006

Net Revenue

Net revenue consists of revenue recognized upon shipment or installation of products using proven technology and upon acceptance of products using new technology. In addition, spare parts sales are recognized upon shipment. Service revenue is recognized upon completion of the service activity or ratably over the term of the service contract. The majority of our revenue is generated from large furnace systems sales which, depending on the timing of shipment and installation, can have a significant impact on our revenue and earnings in any given period. See Critical Accounting Policies – Revenue Recognition.

		Years Ended
		September 30,
								Increase
Net Revenue		2007			2006			(Decrease)			%
		(dollars in thousands)
Semiconductor and Solar Equipment Segment		$	37,657		$	33,363		$	4,294		13	%
Polishing Supplies Segment			8,327			7,082			1,245		18	%
Total		$	45,984		$	40,445		$	5,539		14	%

Overall growth in net revenue in fiscal 2007 was driven primarily by our increased penetration into the solar market where revenue increased $9.7 million or more than 300% compared to fiscal 2006. Within the semiconductor and solar equipment segment, net revenue from the solar market was $12.5 million and $2.8 million in fiscal 2007 and 2006, respectively, while net revenue from the semiconductor market was $25.2 million in fiscal 2007 compared to $30.6 million in fiscal 2006. Net revenue within the semiconductor market in fiscal 2006 was positively impacted by the shipment of a $5.2 million multi-furnace order for which there was no corresponding order of similar magnitude in fiscal 2007. Revenue in the polishing supplies segment increased $1.2 million or 18% due to increased demand for our polishing machines and polishing templates

27

The following table reflects new orders, shipments and net revenue for each quarter for fiscal 2007 and 2006, on a consolidated basis, as well as for each of our two business segments.

																	Semi-
																	conductor
		Fiscal Quarter															and Solar			Polishing
														Fiscal			Equipment			Supplies
		First			Second			Third			Fourth(1)			Year(1)			Segment (1)			Segment
		(dollars in thousands)
2007:
New orders (2)		$	14,056		$	8,527		$	17,334		$	15,623		$	55,540		$	47,026		$	8,514
Shipments			9,967			10,140			13,626			13,472			47,205			38,878			8,327
Net revenues			9,451			10,539			12,874			13,120			45,984			37,657			8,327
Ending backlog			18,205			16,193			20,653			23,156			23,156			21,983			1,173
Book-to-bill ratio			1.4:1			0.8:1			1.3:1			1.2:1			1.2:1			1.2:1			1.0:1
2006:
New orders (2)		$	11,236		$	6,505		$	10,506		$	11,410		$	39,657		$	32,577		$	7,080
Shipments			8,420			11,378			10,899			10,636			41,333			34,251			7,082
Net revenues			7,915			10,892			10,351			11,287			40,445			33,363			7,082
Ending backlog			17,709			13,322			13,477			13,600			13,600			12,614			986
Book-to-bill ratio			1.3:1			0.6:1			1.0:1			1.1:1			1.0:1			1.0:1			1.0:1

____________________

(1)		The backlog as of September 30, 2007 and 2006 includes $0.9 million of open orders or deferred revenue on which we anticipate no gross margin.
(2)		Orders are net of cancellations and include the change in the U. S. dollar value of orders recorded in Euros by our semiconductor and solar equipment segment.

Backlog

Our backlog as of September 30, 2007 and 2006 was $23.2 million and $13.6 million, respectively, a 71% increase. Our backlog as of September 30, 2007 included approximately $17.4 million of orders from our solar industry customers compared to $7.6 million of orders from solar industry customers as of September 30, 2006. The orders included in our backlog are generally credit approved customer purchase orders expected to ship within the next twelve months. Because our orders are typically subject to cancellation or delay by the customer, our backlog at any particular point in time is not necessarily representative of actual sales for succeeding periods, nor is backlog any assurance that we will realize revenue or profit from completing these orders. Our backlog also includes revenue deferred pursuant to our revenue recognition policy, derived from orders that have already been shipped, but which have not met the criteria for revenue recognition.

Gross Profit

Gross profit is the difference between net revenue and cost of goods sold. Cost of goods sold consists of purchased material, labor and overhead to manufacture equipment or spare parts and the cost of service and support to customers for warranty, installation and paid service calls. Gross margin is gross profit as a percentage of net revenue.

		Years Ended
		September 30,						Increase
Gross Profit		2007			2006			(Decrease)			%
		(dollars in thousands)
Semiconductor and Solar Equipment Segment		$	9,995		$	8,461		$	1,534		18	%
Polishing Supplies Segment			2,815			2,114			701		33	%
Total		$	12,810		$	10,575		$	2,235		21	%
Gross Margin			28	%		26	%

Gross profit increased in fiscal 2007 by $2.2 million, or 21%, over fiscal 2006. The increase was driven by higher shipments during the year as well as improved margin percentage. Gross margin was 28% in fiscal 2007 compared to 26% in fiscal 2006. A major factor that contributed to the increase in margin percentage was improved

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capacity utilization in both segments. Additionally, in the semiconductor and solar equipment segment, margins were negatively impacted in fiscal 2006 by approximately $0.7 million of revenue and an equal amount of costs related to customer acceptance of one of our first small batch vertical furnace systems and lower margins on the multi-furnace order shipped during fiscal 2006.

The timing of revenue recognition can have a particularly significant effect on gross margin when the equipment revenue of an order is recognized in one period and the remainder of the revenue attributed to holdbacks is recognized in a later period. The portion of revenue attributed to the holdbacks generally comprises 10-20% of an order and has a significantly higher gross margin percentage.

Selling, General and Administrative Expenses

Selling, general and administrative expenses consist of the cost of employees, consultants and contractors, as well as facility costs, sales commissions, legal and accounting fees and promotional marketing expenses.

		Years Ended
		September 30,						Increase
Selling, General and Administrative		2007			2006			(Decrease)			%
		(dollars in thousands)
Semiconductor and Solar Equipment Segment		$	9,091		$	7,111		$	1,980		28	%
Polishing Supplies Segment			1,414			1,202			212		18	%
Total		$	10,505		$	8,313		$	2,192		26	%
Percent of net revenue			23	%		21	%

Total selling, general and administrative expenses increased $2.2 million or 26% in fiscal 2007 from fiscal 2006. Commissions on sales increased approximately $0.9 million due to increased revenue generated in geographic regions, primarily Asia, where third-party sales representatives are utilized. Other selling costs increased $0.2 million in fiscal 2007 due to increased marketing activities. General and administrative personnel and consulting costs increased in fiscal 2007 as a result of the need to (i) improve internal financial and operational reporting, (ii) identify potential improvements in operational efficiencies, (iii) assist in developing and executing our growth strategies and (iv) manage the increasing compliance obligations of a growing multi-national public company. Stock option expense increased $0.2 million in fiscal 2007.

Restructuring Charges

In June 2006, we adopted a plan to consolidate the manufacturing of our automation product line into facilities already used to manufacture diffusion furnaces. Our automation products are often sold in conjunction with the sale of new diffusion furnaces. As a result of this decision, we recorded $0.2 million of restructuring charges in fiscal 2006. We incurred no comparable costs in fiscal 2007.

Research and Development

Research and development expenses consist of the cost of employees, consultants and contractors who design, engineer and develop new products and processes; materials used in those processes and producing prototypes.

		Years Ended
		September 30,						Increase
Research and Development		2007			2006			(Decrease)			%
		(dollars in thousands)
Semiconductor and Solar Equipment Segment		$	564		$	437		$	127		29	%
Polishing Supplies Segment			—			—			—		0	%
Total		$	564		$	437		$	127		29	%
Percent of net revenue			1	%		1	%

Increased investment in research and development resulted mainly from activity in the development of products and processes to meet the needs of the solar market. Reimbursements of research and development costs in the form of governmental research and development grants amounted to $0.1 million in fiscal 2007 and 2006, respectively, and are netted against these expenses.

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Income Tax Provision

In fiscal 2004 we recorded a valuation allowance for the total of our deferred tax assets. The company, at that time, had incurred substantial book and tax losses and was in a cumulative loss position as defined under SFAS No. 109. During fiscal years 2004 through 2006, we recorded additional tax provisions or benefits as deferred tax assets increased or decreased so that the valuation allowance remained equal to total deferred tax assets. During fiscal 2006, our deferred tax assets declined by $0.2 million, resulting in a decline in our valuation allowance and an equal amount of tax benefit. This resulted in an effective tax rate for fiscal 2006 of 17.5%.

Based upon profitability in fiscal years 2006 and 2007, as well as our strong cash position and strong order backlog, we believe it is more likely than not that we will realize the future tax benefit of a significant portion of our deferred tax assets. Therefore, during fiscal 2007 we recorded reductions in the valuation allowance on deferred tax assets of $1.2 million. Our future effective income tax rate depends on various factors, such as tax legislation, the geographic composition of our pre-tax income, the level of expenses that are not deductible for tax purposes, changes in our deferred tax assets and the effectiveness of our tax planning strategies.

Fiscal 2006 compared to Fiscal 2005

Net Revenue

		Years Ended September 30,
		2006			2005			Inc (Dec)			%
		(dollars in thousands)
Semiconductor Equipment Segment		$	33,363		$	20,668		$	12,695		61	%
Polishing Supplies Segment			7,082			7,231			(149	)	-2	%
Net revenues		$	40,445		$	27,899		$	12,546		45	%

Overall growth in net revenue in fiscal 2006 was fueled by a beginning backlog of $14.4 million, a robust semiconductor equipment market, and increasing penetration into the solar market. Net revenue in fiscal 2006 was positively impacted by the shipment of a $5.2 million multi-furnace order in the quarter ended March 31, 2006, for which there was no corresponding order of similar magnitude in fiscal 2005. In addition, net revenue in fiscal 2006 was positively impacted by revenue related to the solar industry of approximately $2.8 million versus $1.4 million in fiscal 2005.

The decrease in net revenue of the polishing supplies segment was due primarily to a decrease in sales of insert carriers.

The following table reflects new orders⁽¹⁾, shipments and net revenue for each quarter for fiscal 2006 and 2005, on a consolidated basis, as well as for each of our two business segments.

																	Semi-
																	conductor			Polishing
		Fiscal Quarter												Fiscal			Equipment			Supplies
		First			Second			Third			Fourth(2)			Year(2)			Segment (2)			Segment
		(dollars in thousands)
2006:
New orders (2)		$	11,236		$	6,505		$	10,506		$	11,410		$	39,657		$	32,577		$	7,080
Shipments			8,420			11,378			10,899			10,636			41,333			34,251			7,082
Net revenues			7,915			10,892			10,351			11,287			40,445			33,363			7,082
Ending backlog			17,709			13,322			13,477			13,600			13,600			12,614			986
Book-to-bill ratio			1.3:1			0.6:1			1.0:1			1.1:1			1.0:1			1.0:1			1.0:1
2005:
New orders (2)		$	8,323		$	5,079		$	7,152		$	14,433		$	34,987		$	27,884		$	7,104
Shipments			6,952			8,928			5,706			6,888			28,474			21,235			7,239
Net revenues			7,172			8,915			5,507			6,305			27,899			20,669			7,231
Ending backlog			8,451			4,615			6,260			14,388			14,388			13,400			988
Book-to-bill ratio			1.2:1			0.6:1			1.3:1			2.1:1			1.2:1			1.3:1			1.0:1

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____________________

(1)		Orders are net of cancellations and include the change in the U. S. dollar value of orders recorded in Euros by our semiconductor and solar equipment segment.
(2)		The backlog as of September 30, 2006 and 2005 includes $0.9 million and $1.0 million, respectively, of open orders or deferred revenue on which we anticipate no gross margin.

Gross Profit

		Years Ended
		September 30,						Increase
Gross Profit		2006			2005			(Decrease)			%
		(dollars in thousands)
Semiconductor Equipment Segment		$	8,461		$	5,509		$	2,952		54	%
Polishing Supplies Segment			2,114			2,159			(45	)	(2	)%
Total		$	10,575		$	7,668		$	2,907		38	%
Gross Margin			26	%		27	%

Gross profit increased in fiscal 2006 by $2.9 million, or 38%, over fiscal 2005. The increase was driven by higher shipments during the year. Gross margin was 26% in fiscal 2006 compared to 27% in fiscal 2005. Major factors that contributed to the decrease in margin percentage were (i) increase in profit deferred in fiscal 2006 compared to 2005, (ii) recognition of approximately $0.7 million of revenue and an equal amount of costs related to customer acceptance of our small batch vertical furnace and (iii) lower margins on the multi-furnace order shipped during fiscal 2006. The decrease in gross margin was also impacted by a change in product mix, as the polishing supplies segment (which has higher gross margins) declined as a percentage of consolidated revenue.

The timing of revenue recognition can have a particularly significant effect on gross margin when the equipment revenue of an order is recognized in one period and the remainder of the revenue attributed to holdbacks is recognized in a later period. The portion of revenue attributed to the holdbacks generally comprises 10-20% of an order and has a significantly higher gross margin percentage.

Selling, General and Administrative Expenses

		Years Ended
		September 30,						Increase
Selling, General and Administrative		2006			2005			(Decrease)			%
		(dollars in thousands)
Semiconductor Equipment Segment		$	7,111		$	5,918		$	1,193		20	%
Polishing Supplies Segment			1,202			1,367			(165	)	(12	%)
Total		$	8,313		$	7,285		$	1,028		14	%
Percent of net revenue			21	%		26	%

Total selling, general and administrative expenses as a percentage of net revenue decreased to 21% in fiscal 2006 from 26% in fiscal 2005, as a result of higher sales. The $1.0 million increase over fiscal 2005 was due to (i) approximately $0.2 million in increased personnel costs to support the increase in revenue and the increased regulatory obligations associated with being a public company, (ii) increased commissions of approximately $0.2 million resulting from the increased revenue, (iii) $0.2 million in increased non-cash stock-based compensation costs during fiscal 2006 related to the adoption of SFAS 123(R) and (iv) increased legal fees associated with the restructuring of our legal entities in Europe and consulting costs for the initial upgrade of the software used to operate and control our operations in Europe.

Restructuring Charges

In June 2006, we adopted a plan to consolidate the manufacturing of our automation product line into facilities already used to manufacture diffusion furnaces. Our automation products are often sold in conjunction with the sale of new diffusion furnaces. As a result of this decision, we recorded $0.2 million of restructuring charges in fiscal 2006. No comparable costs were incurred in fiscal 2005.

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Research and Development

		Years Ended
		September 30,						Increase
Research and Development		2006			2005			(Decrease)			%
		(dollars in thousands)
Semiconductor Equipment Segment		$	437		$	627		$	(190	)	(30	)%
Polishing Supplies Segment			—			—			—		0	%
Total		$	437		$	627		$	(190	)	(30	)%
Percent of net revenue			1	%		2	%

Development work on the small batch vertical furnace product line in fiscal 2005 was the primary factor in the $0.2 million decrease in research and development expenses in fiscal 2006 compared to the prior year. Reimbursements of research and development costs in the form of governmental research and development grants amounted to $0.1 million in fiscal 2006 and 2005, and are netted against these expenses.

Income Tax Provision

In fiscal 2004, we recorded a valuation allowance for the total of our deferred tax assets, including a net operating loss carryforward. As the deferred tax assets increased or decreased, we recorded an additional tax provision or recognized a benefit, respectively, so that the valuation allowance remained equal to the total of our deferred tax assets. During fiscal 2006, our deferred tax assets declined by $0.2 million, resulting in a decline in our valuation allowance and an equal amount of tax benefit. This resulted in an effective tax rate for fiscal 2006 of 17.5%, compared to a small tax benefit in fiscal 2005. Our future effective income tax rate depends on various factors, such as tax legislation, the geographic composition of our pre-tax income, the level of expenses that are not deductible for tax purposes, changes in our deferred tax assets and the effectiveness of our tax planning strategies.

Liquidity and Capital Resources

In February 2007, we completed the sale of approximately 3 million shares of common stock in a public offering for $7.05 per share. The net proceeds of the sale of common stock after offering expenses and underwriting fees was approximately $19.4 million. We intend to use the remaining proceeds from this offering for working capital and other general corporate purposes, including possible future product or business acquisitions in connection with the planned expansion of our solar and semiconductor businesses.

As of September 30, 2007, and 2006, cash, cash equivalents and restricted cash were $18.8 million, and $6.4 million, respectively. Our working capital increased $18.6 million to $30.5 million as of September 30, 2007, compared to $11.9 million as of September 30, 2006. Our ratio of current assets to current liabilities increased to 3.6:1 as of September 30, 2007 from 2.6:1 as of September 30, 2006. The increase in cash and working capital resulted primarily from the $19.4 million raised from the public offering of common stock during February 2007. The increase was partially offset by $4.2 million of capital expenditures, primarily a building acquired in The Netherlands, which is expected to increase the capacity of our semiconductor and solar equipment segment.

As of September 30, 2007, our principal sources of liquidity consisted of $18.4 million of cash and cash equivalents, $0.4 million of restricted cash and $2.0 million in available domestic credit facilities. Restricted cash consists of bank guarantees in excess of our European overdraft facility. The bank guarantees are required by certain customers from whom amounts have been received in advance of shipment. Our revolving line of credit with Silicon Valley Bank contains certain financial and other covenants. We were in compliance with these covenants and had no outstanding borrowings under these lines as of September 30, 2007. Effective June 30, 2007, we terminated the $1.0 million export credit facility at no cost to us.

The success of our growth strategy is dependent upon the availability of additional capital resources on terms satisfactory to management. Our sources of capital in the past have included capital leases, long-term debt and the sale of equity securities, which include common and preferred stock sold in private transactions and public offerings. Subsequent to September 30, 2007, we utilized approximately $7.1 million of cash, $6.1 million to acquire R2D Ingenierie and made a working capital infusion to R2D of $1.0 million that was used to satisfy certain outstanding obligations. R2D is a solar cell and semiconductor automation equipment manufacturing company located near Montpellier, France. Also, subsequent to September 30, 2007, we completed the sale of 2.5 million shares of common

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stock in a public offering for $14.41 per share. The net proceeds of the sale of common stock after offering expenses and underwriting fees was approximately $33.5 million excluding possible proceeds from the exercise of the underwriters’ right to purchase an additional 375,000 shares. The availability of such capital resources in the future depends on the condition of the relevant debt or equity markets and our long-term and recent operating performance and financial condition. There can be no assurance that we can raise such additional capital resources on satisfactory terms. We intend to use the net proceeds from this offering for working capital and other general corporate purposes. Pending application of these proceeds, we intend to invest the net proceeds in short-term, interest bearing investment grade securities.

The table below provides selected consolidated cash flow information (in thousands) for the periods indicated:

		Fiscal Years Ended September 30,
		2007			2006			2005
Net cash provided by (used in) operating activities		$	(2,276	)	$	3,335		$	(323	)
Net cash (used in) investing activities		$	(4,878	)	$	(956	)	$	(279	)
Net cash provided by financing activities		$	19,554		$	782		$	2,302

Cash Flows from Operating Activities

Cash used in our operating activities was $2.3 million in fiscal 2007, compared to the $3.3 million of cash provided from such activities during fiscal 2006. During fiscal 2007, cash was primarily used to finance business growth, including increases in accounts receivable ($4.7 million), inventory ($2.1 million) and prepaid and other current assets ($0.9 million). This decrease in cash was partially offset by increases in accrued liabilities and customer deposits of $2.4 million, deferred profit of $0.9 million and accounts payable of $0.2 million.

Cash Flows from Investing Activities

Our investing activities for fiscal 2007, 2006 and 2005 used $4.9 million, $1.0 million and $0.3 million, respectively. During fiscal 2007, the most significant investment was approximately $3.7 million for the purchase of and improvements to a 48,000 sq. ft. manufacturing facility located in Vaassen, The Netherlands. Another significant investment in fiscal 2007 was $0.3 million paid for a license to certain solar PECVD technology from the licensor. Other investments in fiscal 2007, 2006 and 2005 consisted primarily of purchases of manufacturing equipment and research and development equipment and upgrades to information systems.

Cash Flows from Financing Activities

Cash provided by our financing activities for fiscal 2007 was $19.6 million, which primarily consists of the $19.4 million, net of expenses, raised in our common stock offering. Other financing activities during fiscal 2007 include equipment financing of $0.4 million, payments on debt of $0.3 million and $0.1 million from the exercise of stock options. Fiscal 2006 cash provided from financing activities consists primarily of $0.8 million from the exercise of warrants and stock options, $0.1 million of net short-term bank borrowings and $0.1 million excess tax benefit of stock options. This was partially offset by $0.1 million of net payments on long-term obligations and $0.1 million in cash dividends paid on preferred stock. This compares to $2.3 million of cash provided by financing activities in fiscal 2005, primarily from the issuance of preferred stock and other borrowings.

We currently anticipate that our existing cash balances, the cash that we expect to generate from our operating activities and available borrowings under our lines of credit will be sufficient to meet our anticipated cash needs for current operations for at least the next 12 months.

Off-Balance Sheet Arrangements

As of September 30, 2007, we had no off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K promulgated by the Securities and Exchange Commission.

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Contractual Obligations and Commercial Commitments

We had the following contractual obligations and commercial commitments as of September 30, 2007:

						Less										More
						than 1				1-3			3-5			than 5
Contractual Obligations		Total				year				years			years			years
		(dollars in thousands)
Long-term debt obligations		$	968			$	224			$	228		$	128		$	388
Operating lease obligations:
Buildings			1,045				406				436			203			—
Office equipment			106				23				46			37			—
Vehicles			184				112				67			5			—
Total operating lease obligations			1,335				541				549			245			—
Purchase obligations			7,232				7,232				—			—			—
Total		$	9,535			$	7,997			$	777		$	373		$	388
Other commerical obligations:
Bank guarantees		$	(800	)		$	(800	)		$	—		$	—		$	—

As of September 30, 2007, we had $7.2 million in purchase obligations compared to $5.7 million and $2.7 million as of September 30, 2006 and 2005, respectively. The increase in purchase obligations is mainly a result of increasing backlog which requires higher inventories and purchase commitments due to higher volume. We have also increased our volume purchasing to reduce costs, and we have experienced longer lead-times required by our suppliers.

Critical Accounting Policies

“Management’s Discussion and Analysis of Financial Condition and Results of Operations” discusses our consolidated financial statements that have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period.

On an on-going basis, we evaluate our estimates and judgments, including those related to revenue recognition, inventory valuation, accounts receivable collectibility, warranty and impairment of long-lived assets. We base our estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances. The results of these estimates and judgments form the basis for making conclusions about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

A critical accounting policy is one that is both important to the presentation of our financial position and results of operations, and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. These uncertainties are discussed in “ITEM 1A. RISK FACTORS”. We believe the following critical accounting policies affect the more significant judgments and estimates used in the preparation of our consolidated financial statements.

Revenue Recognition. We review product and service sales contracts with multiple deliverables to determine if separate units of accounting are present in the arrangements. Where separate units of accounting exist, revenue is allocated to delivered items equal to the total sales price less the greater of (1) the relative fair value of the undelivered items, and (2) all contingent portions of the sales arrangement.

We recognize revenue when persuasive evidence of an arrangement exists; the product has been delivered and title has transferred, or services have been rendered; the seller’s price to the buyer is fixed or determinable and collectibility is reasonably assured. For us, this policy generally results in revenue recognition at the following points:

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• For the semiconductor and solar equipment segment, transactions where legal title passes to the customer upon shipment, we recognize revenue upon shipment for those products where the customer’s defined specifications have been met with at least two similarly configured systems and processes for a comparably situated customer. However, a portion of the revenue associated with certain installation-related tasks, equal to the greater of the relative fair value of those tasks or the portion of the contract price contingent upon their completion, generally 10%-20% of the system’s selling price (the “holdback”), and directly related costs, if any, are deferred and recognized into income when the tasks are completed. Since we defer only those costs directly related to installation or other unit of accounting not yet delivered and the portion of the contract price is often considerably greater than the fair market value of those items, our policy at times will result in deferral of profit that is disproportionately greater than the deferred revenue. When this is the case, the gross profit recognized in one period will be lower and the gross profit reported in a subsequent period will improve.

• For products where the customer’s defined specifications have not been met with at least two similarly configured systems and processes, the revenue and directly related costs are deferred at the time of shipment and recognized into income at the time of customer acceptance or when this criterion has been met. We have, on occasion, experienced longer than expected delays in receiving cash from certain customers pending final installation or system acceptance. If some of our customers refuse to pay the final payment, or otherwise delay final acceptance or installation, the deferred revenue would not be recognized, adversely affecting our future operating results.

• Equipment sold by the polishing supplies segment does not include process guarantees, acceptance criteria or holdbacks; therefore, the related revenue is recorded upon transfer of title which is generally at time of shipment. Our shipping terms for both segments are customarily FOB our shipping point or equivalent terms.

• For all segments, sales of spare parts and consumables are recognized upon shipment, as there are no post shipment obligations other than standard warranties.

• Service revenue is recognized upon performance of the services requested by the customer. Revenue related to service contracts is recognized ratably over the period of the contract or in accordance with the terms of the contract, which generally coincides with the performance of the services requested by the customer.

Deferred Tax Asset Valuation Allowance. We currently have significant deferred tax assets resulting from expenses not currently deductible for tax purposes, revenue recognized for tax purposes but deferred for financial statement purposes and net operating loss carryforwards that will reduce taxable income in future periods. During fiscal 2004, we established a valuation allowance for the total of our deferred tax assets. SFAS No. 109 requires a valuation allowance be established when it is “more likely than not” that all or a portion of deferred tax assets will not be realized. It also states that it is difficult to conclude that a valuation allowance is not needed when there is negative evidence such as cumulative losses in recent years. Therefore, the cumulative losses weigh heavily in the overall assessment. Each quarter, we analyze each deferred tax asset to determine the amount that is more likely than not to be realized, based upon the weight of available evidence, and adjust the valuation allowance to the amount of deferred taxes that do not meet the criteria for recognition under SFAS No. 109.

Inventory Valuation. We value our inventory at the lower of cost (first-in, first-out method) or net realizable value. We regularly review inventory quantities and record a write-down for excess and obsolete inventory. The write-down is primarily based on historical inventory usage adjusted for expected changes in product demand and production requirements. However, our industry is characterized by customers in highly cyclical industries, rapid technological changes, frequent new product developments and rapid product obsolescence. While the inventories acquired in the Bruce Technologies transaction will require several years to consume in production and through spare parts sales, management believes the write-downs taken are sufficient to protect against future losses, as this product line is receiving greater attention under its current ownership. Changes in demand for our products and product mix could result in further write-downs.

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Allowance for Doubtful Accounts. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. This allowance is based on historical experience, credit evaluations, specific customer collection history and any customer-specific issues we have identified. Since a significant portion of our revenue is derived from the sale of high-value systems, our accounts receivable are often concentrated in a relatively few number of customers. A significant change in the liquidity or financial position of any one of these customers could have a material adverse impact on the collectibility of our accounts receivable and our future operating results.

Warranty. We provide a limited warranty, generally for 12 to 24 months, to our customers. A provision for the estimated cost of providing warranty coverage is recorded upon shipment of all systems. On occasion, we have been required and may be required in the future to provide additional warranty coverage to ensure that the systems are ultimately accepted or to maintain customer goodwill. While our warranty costs have historically been within our expectations and we believe that the amounts accrued for warranty expenditures are sufficient for all systems sold through September 30, 2007, we cannot guarantee that we will continue to experience a similar level of predictability with regard to warranty costs. In addition, technological changes or previously unknown defects in raw materials or components may result in more extensive and frequent warranty service than anticipated, which could result in an increase in our warranty expense.

Impairment of Long-lived Assets. We periodically evaluate whether events and circumstances have occurred that indicate the estimated useful lives of long-lived assets or intangible assets may warrant revision or that the remaining balance may not be recoverable. Goodwill is also tested for impairment at least annually. When factors indicate that an asset should be evaluated for possible impairment, we use an estimate of the related undiscounted net cash flows generated by the asset over the remaining estimated life of the asset in measuring whether the asset is recoverable. We make judgments and estimates used in establishing the carrying value of long-lived or intangible assets. Those judgments and estimates could be modified if adverse changes occurred in the future resulting in an inability to recover the carrying value of these assets. We have not experienced any impairment to long-lived assets during fiscal 2007 or 2006. Future adverse changes could be caused by, among other factors, a downturn in the semiconductor industry, a general economic slowdown, reduced demand for our products in the marketplace, poor operating results, the inability to protect intellectual property or changing technologies and product obsolescence.

Stock-Based Compensation. On October 1, 2005, the Company adopted Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment” (SFAS 123(R)) and Staff Accounting Bulletin 107, “Share-Based Payment”. SFAS 123(R) requires the recognition of compensation costs relating to share-based payment transactions in the financial statements. Prior to the adoption of SFAS 123(R) the Company elected to account for share-based compensation plans using the intrinsic value method under Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” under which no compensation cost is recognized and the pro forma effects on earnings and earnings per share are disclosed as if the fair value approach had been adopted. Under the fair value method, the estimated fair value of awards is charged to income on a straight-line basis over the requisite service period, which is generally the vesting period. The Company has elected the modified prospective application method of reporting; therefore, prior periods were not restated. Under the modified prospective method, this statement was applied to new awards granted after the time of adoption, as well as to the unvested portion of previously granted awards for which the requisite service had not been rendered as of October 1, 2005. SFAS 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as cash flow from financing activities rather than as cash flow from operating activities.

Impact of Recently Issued Accounting Pronouncements

For discussion of the impact of recently issued accounting pronouncements, see “Item 8: Financial Statements and Supplementary Data” under Footnote 1 “Summary of Significant Accounting Policies” under “Impact of Recently Issued Accounting Pronouncements”.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Currency Risk

We are exposed to foreign currency exchange rates to the extent sales contracts, purchase contracts, assets or liabilities of our European operations are denominated in currencies other than their functional currency, Our operations in Europe, a component of the semiconductor and solar equipment segment, conduct business primarily in their functional currency, the Euro, and the U.S. dollar. Nearly all of the transactions, assets and liabilities of all other operating units are denominated in the U.S. dollar, their functional currency. In fiscal 2007 the U.S. dollar weakened relative to the Euro by 8.1% and strengthened relative to the Euro by 3.3% in 2006. It is highly uncertain how currency exchange rates will fluctuate in the future. Actual changes in foreign exchange rates could adversely affect our operating results or financial condition.

As of September 30, 2007, we did not hold any stand-alone or separate derivative instruments. We incurred net foreign currency transaction losses of $0.1 million in fiscal 2007 and gains of $0.1 million in fiscal 2006. As of September 30, 2007, our foreign subsidiaries had $14.0 million of assets (cash and receivables) denominated in U.S. dollars, rather than Euros, which is their functional currency. A 10% change in the value of the functional currency relative to the non-functional currency would result in a gain or loss of $1.4 million. As of the end of fiscal 2007 we had $10.9 million of accounts payable, consisting primarily of amounts owed by foreign subsidiaries to our U.S. companies, denominated in U.S. dollars. Even though the intercompany accounts are eliminated in consolidation, a 10% change in the value of the Euro relative to the U.S. dollar would result in a gain or loss of $1.1 million. Our net investment in and long-term advances to our foreign operations totaled $3.8 million as of September 30, 2007. A 10% change in the value of the Euro relative to the U.S. dollar would cause an approximately $0.4 million foreign currency translation adjustment, a type of other comprehensive income (loss), which would be a direct adjustment to our stockholders’ equity.

During fiscal 2007 and 2006, U.S. dollar denominated sales of our European operations were $9.9 million and $9.5 million, respectively. As of September 30, 2007, sales commitments denominated in a currency other than the functional currency of our transacting operation totaled $0.6 million. Our lead-times range between 13 and 20 weeks. A 10% change in the relevant exchange rates between the time the order was taken and the time of shipment would cause our gross profit on such orders to be approximately $0.1 million less than expected on the date the order was taken.

All operations become less competitive relative to foreign suppliers when their functional currency strengthens relative to that of the foreign supplier. Our European operations are particularly affected when selling to customers in Asia when such customers require a purchase price in U.S. dollars. If the value of the U.S. dollar has strengthened or weakened relative to the Euro our gross margin will be reduced or increased, respectively, relative to prior transactions unless we are able to make a commensurate increase or decrease, respectively, in our selling price.

Interest Rate Risk

Our exposure to changes in interest rates is limited to interest earned on money market accounts and interest expense on $0.5 million of long term obligations and intermittent short-term borrowings. This exposure is currently not significant.

37

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The following documents are filed as part of this Annual Report on Form 10-K:

Financial Statements
Report of Independent Registered Public Accounting Firm	39
Consolidated Balance Sheets: September 30, 2007 and 2006	40
Consolidated Statements of Operations: Years ended September 30, 2007, 2006 and 2005	41
Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss): Years ended September 30, 2007, 2006 and 2005	42
Consolidated Statements of Cash Flows: Years ended September 30, 2007, 2006 and 2005	43
Notes to Consolidated Financial Statements	44

38

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders
Amtech Systems, Inc.:

We have audited the accompanying consolidated balance sheets of Amtech Systems, Inc. and subsidiaries (the Company) as of September 30, 2007 and 2006 and the related consolidated statements of operations, stockholders’ equity and comprehensive income (loss) and cash flows for each of the years in the three year period ended September 30, 2007. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Amtech Systems, Inc. and subsidiaries as of September 30, 2007 and 2006, and the results of their operations and their cash flows for the each of the years in the three year period ended September 30, 2007, in conformity with U.S. generally accepted accounting principles.

	/s/ Mayer Hoffman McCann P.C.
Phoenix, Arizona
December 10, 2007

39

PART I FINANCIAL INFORMATION

AMTECH SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands except share data)

		September 30,
		2007			2006
Assets
Current Assets
Cash and cash equivalents		$	18,370		$	6,433
Restricted cash			443			—
Accounts receivable
Trade (less allowance for doubtful accounts of $126 and $223 at
September 30, 2007 and September 30, 2006, respectively)			9,952			6,545
Unbilled and other			3,127			849
Inventories			7,289			4,979
Deferred income taxes			1,690			—
Other			1,339			414
Total current assets			42,210			19,220
Property, Plant and Equipment - Net			6,245			2,382
Deferred Income Taxes - Long Term			30			—
Intangible Assets - Net			1,364			1,144
Goodwill			817			817
Total Assets		$	50,666		$	23,563
Liabilities and Stockholders’ Equity
Current Liabilities
Accounts payable		$	4,150		$	3,631
Bank loans and current maturities of long-term debt			224			258
Accrued compensation and related taxes			2,139			1,390
Accrued warranty expense			256			289
Deferred profit			2,144			1,071
Customer deposits			1,824			—
Other accrued liabilities			562			379
Income taxes payable			419			319
Total current liabilities			11,718			7,337
Other Long-Term Obligations			744			617
Total liabilities			12,462			7,954
Commitments and Contingencies
Stockholders’ Equity
Preferred stock; 100,000,000 shares authorized; none issued			—			—
Common stock; $0.01 par value; 100,000,000 shares authorized;
shares issued and outstanding: 6,517,923 and 3,476,042
at September 30, 2007 and September 30, 2006, respectively			65			35
Additional paid-in capital			35,610			15,774
Accumulated other comprehensive income			813			501
Retained earnings (deficit)			1,716			(701	)
Total stockholders’ equity			38,204			15,609
Total Liabilities and Stockholders’ Equity		$	50,666		$	23,563

The accompanying notes are an integral part of these consolidated financial statements.

40

AMTECH SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(in thousands, except per share data)

	Years Ended September 30,
	2007				2006				2005
Revenues, net of returns and allowances	$	45,984			$	40,445			$	27,899
Cost of sales		33,174				29,870				20,231
Gross profit		12,810				10,575				7,668
Selling, general and administrative		10,505				8,313				7,285
Restructuring charge		—				190				—
Research and development		564				437				627
Operating income (loss)		1,741				1,635				(244	)
Interest and other income (expense), net		336				(37	)			70
Income (loss) before income taxes		2,077				1,598				(174	)
Income tax provision (benefit)		(340	)			280				85
Net income (loss)	$	2,417			$	1,318			$	(259	)
Income (Loss) Per Share:
Basic income (loss) per share	$	0.45			$	0.40			$	(0.12	)
Weighted average shares outstanding		5,419				3,126				2,705
Diluted income (loss) per share	$	0.44			$	0.38			$	(0.12	)
Weighted average shares outstanding		5,498				3,484				2,705

The accompanying notes are an integral part of these consolidated financial statements.

41

AMTECH SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements Of Stockholders' Equity
And Comprehensive Income (Loss)

			Common Stock					Preferred Stock											Accumulated				Retained
			Number					Number							Additional				Other				Earnings				Total
			of					of							Paid-In				Comprehensive				(Accumulated				Stockholders’
(in thousands)			Shares		Amount			Shares			Amount				Capital				Income (Loss)				Deficit)				Equity
Balance at September 30, 2004			2,705		$	27		—			$	—			$	12,888			$	500			$	(1,760	)		$	11,655
Net loss																								(259	)			(259	)
Translation adjustment																				(96	)							(96	)
Comprehensive loss																												(355	)
Issuance of preferred stock								540				1,859				49												1,908
Dividends on preferred stock												76				(76	)											—
Balance at September 30, 2005			2,705		$	27		540			$	1,935			$	12,861			$	404			$	(2,019	)		$	13,208
Net income																								1,318				1,318
Translation adjustment																				97								97
Comprehensive income																												1,415
Conversion of preferred stock			540			5		(540	)			(1,859	)			1,854												—
Dividends on preferred stock												81				(81	)											—
Preferred cash dividend paid												(83	)															(83	)
Preferred dividend
paid in common stock			9			—						(74	)			74												—
Warrants exercised			60			1										252												253
Tax benefit of stock options																134												134
Stock options expense																176												176
Stock options exercised			162			2										504												506
Balance at September 30, 2006			3,476		$	35		—			$	—			$	15,774			$	501			$	(701	)		$	15,609
Net income																								2,417				2,417
Translation adjustment																				312								312
Comprehensive income																												2,729
Issuance of common stock			3,019			30										19,380												19,410
Stock options expense																347												347
Stock options exercised			23			—										109												109
Balance at September 30, 2007			6,518		$	65		—			$	—			$	35,610			$	813			$	1,716			$	38,204

The accompanying notes are an integral part of these consolidated financial statements.

42

AMTECH SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements Of Cash Flows
(in thousands)

	Year Ended September 30,
	2007				2006				2005
Operating Activities
Net income (loss)	$	2,417			$	1,318			$	(259	)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization		706				642				675
Write-down of inventory		210				114				291
Provision for (reversal of) allowance for doubtful accounts		(95	)			36				76
Deferred income taxes		(1,720	)			—				—
Non-cash share based compensation expense		347				176				—
Other		(16	)			—				14
Changes in operating assets and liabilities:
Accounts receivable		(4,718	)			(2,281	)			(1,437	)
Inventories		(2,146	)			(676	)			1,498
Accrued income taxes		70				735				212
Prepaid expenses and other assets		(891	)			281				(329	)
Accounts payable		206				2,383				(312	)
Accrued liabilities and customer deposits		2,427				181				(240	)
Deferred profit		927				426				(512	)
Net cash provided by (used in) operating activities		(2,276	)			3,335				(323	)
Investing Activities
Purchases of property, plant and equipment		(4,161	)			(956	)			(279	)
Proceeds from the sale of property, plant and equiment		26				—				—
Increase in restricted cash		(443	)			—				—
Payment for licensing agreement		(300	)			—				—
Net cash used in investing activities		(4,878	)			(956	)			(279	)
Financing Activities
Proceeds from issuance of common stock, net		19,519				759				—
Proceeds from issuance of preferred stock		—				—				1,908
Preferred stock cash dividends paid		—				(84	)			—
Payments on long-term obligations		(209	)			(138	)			(106	)
Borrowings on long-term obligations		355				—				500
Net short-term borrowings (payments)		(111	)			111				—
Excess tax benefit of stock options		—				134				—
Net cash provided by financing activities		19,554				782				2,302
Effect of Exchange Rate Changes on Cash		(463	)			(37	)			(65	)
Net Increase in Cash and Cash Equivalents		11,937				3,124				1,635
Cash and Cash Equivalents, Beginning of Year		6,433				3,309				1,674
Cash and Cash Equivalents, End of Year	$	18,370			$	6,433			$	3,309
Supplemental Cash Flow Information:
Interest paid	$	301			$	131			$	80
Income tax refunds		159				617				—
Income tax payments		1,309				24				141
Supplemental Non-cash Financing Activities:
Stock issued for preferred stock dividend		—				74				—
Preferred stock dividend accrual		—				81				76
Preferred stock converted to common stock		—				1,859				—
Warrant issued		—				—				49

The accompanying notes are an integral part of these consolidated financial statements.

43

Notes to Consolidated Financial Statements

For the Years Ended September 30, 2007, 2006 and 2005

1.     Summary of Significant Accounting Policies

Nature of Operations and Basis of Presentation – Amtech Systems, Inc. (the “Company”) designs, assembles, sells and installs capital equipment and related consumables used in the manufacture of wafers, primarily for the semiconductor and solar industries. The Company sells these products to manufacturers of silicon wafers, semiconductors and solar cells worldwide, particularly in the United States, Asia and northern Europe. In addition, the Company provides semiconductor manufacturing support services.

The Company serves niche markets in industries that are experiencing rapid technological advances, and which historically have been very cyclical. Therefore, future profitability and growth depend on the Company’s ability to develop or acquire and market profitable new products, and on its ability to adapt to cyclical trends.

Principles of Consolidation – The consolidated financial statements include the accounts of Amtech and its wholly owned subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation.

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

Revenue Recognition – Revenue is recognized upon shipment of the Company’s proven technology equal to the sales price less the greater of (i) the fair value of undelivered services and (ii) the contingent portion of the sales price, which is generally 10-20% of the total contract price. The entire cost of the equipment relating to proven technology is recorded upon shipment. The remaining contractual revenue, deferred costs, and installation costs are recorded upon successful installation of the product.

For purposes of revenue recognition, proven technology means that the Company has a history of at least two successful installations. New technology systems are those systems with respect to which the Company cannot demonstrate that it can meet the provisions of customer acceptance at the time of shipment.

Revenue on new technology is deferred until installation and acceptance at the customer’s premises is completed, as these sales do not meet the provisions of customer acceptance at the time of shipment. Cost of the equipment relating to new technology is recorded against deferred profit and then recorded in cost of sales upon customer acceptance.

Revenue from services is recognized as the services are performed. Revenue from prepaid service contracts is recognized ratably over the life of the contract. Revenue from spare parts is recorded upon shipment.

Deferred Profit – Revenue deferred pursuant to our revenue policy, net of the related deferred costs, if any, is recorded as deferred profit in current liabilities. The components of deferred profit are as follows:

	September 30,
	2007			2006			2005
	(dollars in thousands)
Deferred revenues	$	3,894		$	2,493		$	1,662
Deferred costs		1,750			1,422			1,038
Deferred profit	$	2,144		$	1,071		$	624

Restricted Cash – Restricted cash of $0.4 million as of September 30, 2007 consists of bank guarantees in excess of our European overdraft facility. The bank guarantees are required by certain customers from whom amounts have been received in advance of shipment. There were no restrictions on cash as of September 30, 2006.

44

Accounts Receivable and Allowance for Doubtful Accounts – Accounts receivable are recorded at the gross sales price of products sold to customers on trade credit terms. Accounts receivable are considered past due when payment has not been received from the customer within the normal credit terms extended to that customer. Accounts are charged-off against the allowance when the probability of collection is remote.

The following is a summary of the activity in the Company’s allowance for doubtful accounts:

	Years Ended September 30,
	2007				2006				2005
	(dollars in thousands)
Balance at beginning of year	$	223			$	223			$	188
Provision / (adjustment)		(81	)			43				76
Write offs		(16	)			(43	)			(41	)
Balance at end of year	$	126			$	223			$	223

Accounts Receivable – Unbilled and Other – Unbilled and other accounts receivable consist mainly of the contingent portion of the sales price that is not collectible until successful installation of the product. These amounts are generally billed upon final acceptance by our customers. The majority of these amounts are offset by balances included in deferred profit.

Concentrations of Credit Risk – Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of trade accounts receivable. The Company’s customers consist of manufacturers of semiconductors, semiconductor wafers, MEMS and solar cells located throughout the world. Credit risk is managed by performing ongoing credit evaluations of the customers’ financial condition, by requiring significant deposits where appropriate, and by actively monitoring collections. Letters of credit are required of certain customers depending on the size of the order, type of customer or its creditworthiness, and its country of domicile. Reserves for potentially uncollectible receivables are maintained based on an assessment of collectibility.

As of September 30, 2007, receivables from three customers individually represented 22%, 13% and 10% of accounts receivable. As of September 30, 2006, receivables from three customers individually represented 19%, 13%, and 12% of accounts receivable, respectively.

Refer to Note 10, Business Segment Information, for information regarding revenue and assets in other countries subject to foreign currency exchange rates.

Inventories – Inventories are stated at the lower of cost (first-in, first-out method) or net realizable value. The components of inventories are as follows:

	September 30,			September 30,
	2007			2006
		(In thousands)
Purchased parts and raw materials	$	5,291		$	3,400
Work-in-process		1,456			1,159
Finished goods		542			420
	$	7,289		$	4,979

Property, Plant and Equipment – Property plant, and equipment are recorded at cost. Maintenance and repairs are charged to expense as incurred. The cost of property retired or sold and the related accumulated depreciation are removed from the applicable accounts when disposition occurs and any gain or loss is recognized. Depreciation is computed using the straight-line method. Useful lives for equipment, machinery and leasehold improvements range from three to seven years; for furniture and fixtures from five to ten years; and for buildings twenty years.

45

In March 2007, the Company purchased a manufacturing facility in The Netherlands for a purchase price of approximately $3.1 million and has made $0.6 million in improvements. The following is a summary of property, plant and equipment:

	September 30,				September 30,
	2007				2006
	(dollars in thousands)
Land, building and leasehold improvements	$	5,105			$	1,094
Equipment and machinery		2,874				2,676
Furniture and fixtures		2,570				2,514
		10,549				6,284
Accumulated depreciation and amortization		(4,304	)			(3,902	)
	$	6,245			$	2,382

Goodwill – Goodwill and intangible assets with indefinite lives are not subject to amortization, but are tested for impairment at least annually. The Company accounts for goodwill under the provisions of SFAS No. 142. Accordingly, goodwill is reviewed for impairment on an annual basis, typically at the end of the fiscal year or more frequently if circumstances dictate. Based on the Company’s analysis, there was no impairment of goodwill for the years ended September 30, 2007, 2006 and 2005.

Intangibles – Intangible assets are capitalized and amortized over 4 to 15 years if the life is determinable. If the life is not determinable, amortization is not recorded. Amortization expense related to intangible assets was $80,000, $84,000 and $117,000 in fiscal 2007, 2006 and 2005, respectively. The aggregate amortization expense for the intangible assets for each of the five succeeding fiscal years is estimated to be $88,000, $83,000, $83,000, $83,000, $83,000 and $942,000 in 2008, 2009, 2010, 2011, 2012 and thereafter, respectively.

In April 2007, the company entered into a license agreement with PST Co., LTD (PST) to market, sell, install, service and manufacture machinery and equipment for the manufacturing of photovoltaic cells that employs PECVD Technology (Licensed Product) developed by PST. Under the terms of this agreement the Company paid $0.3 million to PST in April, with an additional payment due of $0.7 million upon the development of the Licensed Product. Under the terms of the agreement PST is required to return the original payment if the development of the Licensed Product is unsuccessful The license agreement expires in April 2017. These payments will be amortized over the life of the agreement beginning with the successful development of the Licensed Product.

The following is a summary of intangibles:

			September 30,				September 30,
	Useful Life		2007				2006
			(dollars in thousands)
Patents	7 yrs		$	—			$	74
Trademarks	Indefinite			592				592
Non-compete agreements	10 yrs			350				350
Customer lists	15 yrs			276				276
Technology	4 yrs			102				102
Licenses	10 years			300				—
				1,620				1,394
Accumulated amortization				(256	)			(250	)
			$	1,364			$	1,144

Proprietary Product Rights – Through the acquisition of the net assets of P. R. Hoffman in 1997, the Company acquired the license for the design of its steel carriers with plastic inserts for abrasive machining of silicon wafers. In 1995, P. R. Hoffman licensed the patent rights from the patent holder, and paid a royalty to the patent holder for the use of such patent rights. Per the license agreement, royalties ceased to accrue on July 2, 2006. Royalty expense for all licenses is included in cost of sales and totaled $26,000, $113,000 and $149,000 in fiscal 2007, 2006 and 2005, respectively.

46

Warranty – A limited warranty is provided free of charge, generally for periods of 12 to 24 months to all purchasers of the Company’s new products and systems. Accruals are recorded for estimated warranty costs at the time revenue is recognized. The following is a summary of activity in accrued warranty expense:

	Years Ended September 30,
	2007				2006				2005
	(dollars in thousands)
Beginning balance	$	289			$	248			$	260
Warranty expenditures		(84	)			(54	)			(52	)
Reserve Adjustment		51				95				40
Ending balance	$	256			$	289			$	248

Research and Development Expenses – Product development costs are expensed as incurred.

Foreign Currency Transactions and Translation – Financial information relating to the Company’s foreign subsidiaries is reported in accordance with SFAS No. 52, “Foreign Currency Translation.” The functional currency of the Company’s European operations is the Euro. Net income (loss) includes pretax net gains (losses) from foreign currency transactions of ($125,000), ($62,000), and $105,000 in fiscal 2007, 2006 and 2005, respectively. The gains or losses resulting from the translation of Tempress’ financial statements have been included in other comprehensive income (loss).

Income Taxes – The Company files consolidated federal income tax returns and computes deferred income tax assets and liabilities based upon cumulative temporary differences between financial reporting and taxable income, carryforwards available and enacted tax laws.

Deferred tax assets reflect the tax effects of temporary differences between the carrying value of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. SFAS No. 109 “Accounting for Income Taxes” requires that a valuation allowance is recognized if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax asset will not be realized. Each quarter the valuation allowance is re-evaluated. During fiscal 2007, continued improvement in both our earnings history and our prospects for the future resulted in a $1.2 million lower estimate of the amount of deferred assets that more likely than not will be unrealizable. Tax payments of $1.3 million were made during 2007. During fiscal 2007, the Company also recorded an increase of $0.5 million in deferred tax assets for items that meet the more likely than not criteria for recognition under SFAS No. 109.

Stock-Based Compensation – On October 1, 2005, the Company adopted Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment” (SFAS 123(R)) and Staff Accounting Bulletin 107, “Share-Based Payment”. SFAS 123(R) requires the recognition of compensation costs relating to share-based payment transactions in the financial statements. Prior to the adoption of SFAS 123(R) the Company elected to account for share-based compensation plans using the intrinsic value method under Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” under which no compensation cost is recognized and the pro forma effects on earnings and earnings per share are disclosed as if the fair value approach had been adopted. Under the fair value method, the estimated fair value of awards is charged to income on a straight-line basis over the requisite service period, which is generally the vesting period. The Company has elected the modified prospective application method of reporting; therefore, prior periods were not restated. Under the modified prospective method, this statement was applied to new awards granted after the time of adoption, as well as to the unvested portion of previously granted awards for which the requisite service had not been rendered as of October 1, 2005. SFAS 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as cash flow from financing activities rather than as cash flow from operating activities.

47

Stock-based compensation expense recognized under SFAS 123(R) for the fiscal years ended September 30, 2007 and 2006 reduced the Company’s results of operations as follows:

	Years Ended September 30,
	2007				2006
	(dollars in thousands,
	except per share amounts)
Effect on income before income taxes	$	(347	)		$	(176	)
Effect on net income	$	(295	)		$	(88	)
Effect on basic income per share	$	(0.06	)		$	(0.03	)
Effect on diluted income per share	$	(0.06	)		$	(0.03	)

The following table illustrates the pro-forma effect on net loss and on net loss per share, as if the fair value recognition provisions of SFAS No. 123 had been applied:

	Year Ended September 30,
	2005
	(dollars in thousands,
	except per share amounts)
Net loss, as reported	$	(259	)
Add: Stock-based compensation included in net
loss as reported		—
Less: Stock-based compensation under the fair-
value method, net of tax		279
Net loss, pro forma	$	(538	)
Basic Loss Per Share:
As reported	$	(0.12	)
Pro forma		(0.23	)
Diluted Loss per Share:
As reported	$	(0.12	)
Pro forma		(0.23	)

Qualified stock options issued under the terms of the plans have, or will have, an exercise price equal to, or greater than, the fair market value of the common stock at the date of the option grant, and expire no later than ten years from the date of grant, with the most recent grant expiring in 2017. Options vest over 1 to 5 years. The Company estimates the fair value of awards on the date of grant using the Black-Scholes option pricing model using the following assumptions.

	Years Ended September 30,
	2007		2006		2005
Risk free interest rate	4.1% to 4.9%		4.4% to 5.1%		4.0% to 4.2%
Expected life	2 to 6 years		4 to 8 years		5 years
Dividend rate	0%		0%		0%
Volatility	54% to 69%		63% to 101%		39% to 40%
Forfeiture rate	5%		7%		—

To estimate expected lives for this valuation, it was assumed that options will be exercised at varying schedules after becoming fully vested. In accordance with SFAS 123(R), forfeitures have been estimated at the time of grant and will be revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based upon historical experience. Fair value computations are highly sensitive to the volatility factor assumed; the greater the volatility, the higher the computed fair value of the options granted.

48

Fair Value of Financial Instruments – The carrying values of the Company’s current financial instruments approximate fair value due to the short term in which these instruments mature. The carrying values of the Company’s line of credit (see Note 5) and long-term debt (see Note 6) approximate fair value because their variable interest rates approximate the prevailing interest rates for similar debt instruments.

Impact of Recently Issued Accounting Pronouncements

In June 2006, the FASB published FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. SFAS No. 109 does not prescribe a recognition threshold or measurement attributable for the financial statement recognition and measurement of a tax position taken in a tax return. Diversity in practice exists in the accounting for income taxes. To address that diversity this Interpretation clarifies the application of SFAS No. 109 by defining a criterion that an individual tax position must meet for any part of the benefit of that position to be recognized in an enterprise’s financial statements. Additionally, this Interpretation provides guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition for such uncertain tax transactions. This Interpretation is effective for the Company’s 2008 fiscal year (beginning October 1, 2007). The Company has not yet determined the impact, if any, that the adoption of Interpretation No. 48 will have on its consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”. SFAS No. 157 defines fair value, establishes a formal framework for measuring fair value and expands disclosures about fair value measurements. The Company has not yet determined the impact, if any, that SFAS No. 157 will have on its consolidated financial statements. SFAS No. 157 is effective for the Company’s fiscal year beginning October 1, 2008.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities (as amended)”. SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. In addition, FAS No. 159 establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. The Company has not yet determined the impact, if any, that SFAS No. 159 will have on its consolidated financial statements. SFAS No. 159 is effective for the Company’s fiscal year beginning October 1, 2008.

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations”. This Statement replaces SFAS No. 141, Business Combinations. This Statement retains the fundamental requirements in Statement 141 that the acquisition method of accounting (which Statement 141 called the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination. This Statement also establishes principles and requirements for how the acquirer: a) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree; b) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase and c) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141(R) will apply prospectively to business combinations for which the acquisition date is on or after Company’s fiscal year beginning October 1, 2009. While the Company has not yet evaluated this statement for the impact, if any, that SFAS No. 141(R) will have on its consolidated financial statements, the Company will be required to expense costs related to any acquisitions after September 30, 2009.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements”. This Statement amends ARB 51 to establish accounting and reporting standards for the noncontrolling (minority) interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. The Company has not yet determined the impact, if any, that SFAS No. 160 will have on its consolidated financial statements. SFAS No. 160 is effective for the Company’s fiscal year beginning October 1, 2009.

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2.     Stock-Based Compensation

Stock Option Plans –The 2007 Employee Stock Option Plan (the “2007 Plan), under which 500,000 shares could be granted, was adopted by the Board of Directors in April 2007, and approved by the shareholders in May 2007. The 1998 Employee Stock Option Plan (the “1998 Plan”), under which 50,000 shares could be granted, was adopted by the Board of Directors in January 1998, and approved by shareholders in March 1998. The number of shares available for options under the 1998 Plan has since been increased to 500,000 shares through authorization by the Board of Directors and approval of shareholders. The 1998 Plan expires in January of 2008 and we expect all remaining available shares to be granted prior to expiration. The Non-Employee Directors Stock Option Plan was approved by the shareholders in 1996 for issuance of up to 100,000 shares of common stock to directors. In July 2005, the Board of Directors authorized, and shareholders approved, an increase in the number of shares available for options under the Non-Employee Directors Stock Option Plan to 200,000 shares.

Stock options issued under the terms of the plans have, or will have, an exercise price equal to or greater than the fair market value of the common stock at the date of the option grant and expire no later than 10 years from the date of grant, with the most recent grant expiring in 2017. Options issued by the Company vest over one to five years. The Company may also grant restricted stock awards under the 2007 Plan.

Stock-based compensation plans are summarized in the table below:

			Shares		Shares		Options
Name of Plan			Authorized		Available		Outstanding		Plan Expiration
2007 Employee Stock Incentive Plan			500,000		500,000		—		April 2017
1998 Employee Stock Option Plan			500,000		12,187		395,303		January 2008
Non-Employee Directors Stock Option Plan			200,000		78,600		55,000		July 2015
					590,787		450,303

Stock options were valued using the Black-Scholes option pricing model. See Note 1 for further discussion. Stock option transactions and the options outstanding are summarized as follows:

	Years Ended September 30,
	2007							2006							2005
					Weighted							Weighted							Weighted
					Average							Average							Average
					Exercise							Exercise							Exercise
	Options				Price			Options				Price			Options				Price
Outstanding at beginning of period		308,384			$	5.95			468,206			$	4.78			439,017			$	4.83
Granted		173,500				7.05			37,522				7.16			30,789				3.99
Exercised		(23,131	)			4.72			(161,446	)			3.14			(100	)			2.00
Forfeited/cancelled		(8,450	)			6.19			(35,898	)			4.58			(1,500	)			4.36
Outstanding at end of period		450,303				6.44			308,384			$	5.95			468,206			$	4.78
Exercisable at end of period		251,254			$	6.05			241,752			$	5.91			348,684			$	4.64
Weighted average grant-date fair value of
options granted during the period	$	4.62						$	5.33						$	1.64

 

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The following tables summarize information for stock options outstanding and exercisable as of September 30, 2007:

		Options Outstanding
				Remaining		Weighted
		Number		Contractual		Average			Aggregate
Range of Exercise Prices		Outstanding		Life		Exercise Price			Intrinsic Value
				(in years)					(in thousands)
$2.00 - 3.00		1,500		2.0		$	2.00		$	16
3.01 - 4.00		12,835		6.6			3.24			123
4.01 - 5.00		42,500		5.0			4.60			349
5.01 - 6.00		58,218		4.6			5.74			412
6.01 - 7.00		272,250		6.0			6.71			1,664
7.01 - 8.00		32,000		9.4			7.30			177
8.01 - 9.00		21,000		9.1			8.38			93
9.01 - 10.00		10,000		8.4			9.05			38
		450,303		6.2		$	6.44		$	2,872
Vested and expected to vest as of September 30, 2007		431,592		6.4		$	6.07		$	2,760
		Options Exercisable
				Remaining		Weighted
		Number		Contractual		Average			Aggregate
Range of Exercise Prices		Exercisable		Life		Exercise Price			Intrinsic Value
				(in years)					(in thousands)
$2.00 - 3.00		1,500		2.00		$	2.00		$	16
3.01 - 4.00		6,002		5.64			3.25			57
4.01 - 5.00		37,834		4.70			4.57			312
5.01 - 6.00		47,001		4.36			5.72			334
6.01 - 7.00		150,250		3.45			6.52			946
7.01 - 8.00		—		—			—			—
8.01 - 9.00		2,000		8.56			8.51			9
9.01 - 10.00		6,667		8.42			9.05			25
		251,254		4.03		$	6.05		$	1,699

The aggregate intrinsic value in the tables above represents the total pretax intrinsic value, based on the Company’s closing stock price of $12.82 per share as of September 28, 2007, which would have been received by the option holders had all option holders exercised their options as of that date. The total intrinsic value of stock options exercised during the fiscal year ended September 30, 2007 was $0.1 million. The total intrinsic value of stock options exercised during the fiscal years ended September 30, 2006 and 2005 was $0.8 million and less than $0.1 million, respectively.

3.     Earnings Per Share

Basic earnings per share is computed by dividing net income (loss) available to common stockholders (net income less accrued preferred stock dividends) by the weighted average number of common shares outstanding for the period. Diluted earnings per share is computed similarly to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if potentially dilutive common shares had been issued, and the numerator is based on net income. In the case of a net loss, diluted earnings per share is calculated in the same manner as basic earnings per share. Options and warrants of approximately 196,000, 50,000 and 528,000 shares are excluded from the fiscal 2007, 2006 and 2005 earnings per share calculations as they are anti-dilutive.

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		2007			2006				2005
Basic Loss Per Share Computation		(dollars in thousands, except per share amounts)
Net Income (loss)		$	2,417		$	1,318			$	(259	)
Preferred stock dividends			—			(81	)			(76	)
Net income (loss) available to
common stockholders		$	2,417		$	1,237			$	(335	)
Weighted Average Shares Outstanding:
Common stock			5,419			3,126				2,705
Basic income (loss) per share		$	0.45		$	0.40			$	(0.12	)
Diluted Loss Per Share Computation
Net income (loss)		$	2,417		$	1,318			$	(259	)
Weighted Average Shares Outstanding:
Common stock			5,419			3,126				2,705
Common stock equivalents			79			358				—
Diluted shares			5,498			3,484				2,705
Diluted income (loss) per share		$	0.44		$	0.38			$	(0.12	)

4.     Comprehensive Income (Loss)

	Years Ended September 30,
	2007			2006			2005
	(dollars in thousands)
Net income (loss), as reported	$	2,417		$	1,318		$	(259	)
Foreign currency translation adjustment		312			97			(96	)
Comprehensive income (loss)	$	2,729		$	1,415		$	(355	)

5.     Line of Credit

On April 7, 2006, the Company entered into domestic and export revolver loan and security agreements (“LSAs”) with the Silicon Valley Bank and a Working Capital Guarantee Program Borrower Agreement with the Export-Import Bank of the United States, all of which expire April 7, 2008. The Company can borrow a maximum of $2.0 million under the domestic LSA, subject to the availability of sufficient eligible receivables and inventory, as defined under the agreement, and subject to certain other restrictions. Effective June 30, 2007, the Company terminated the $1.0 million export revolver loan and security agreement (LSA) with the Silicon Valley Bank and the Working Capital Guarantee Program Borrower Agreement with the Export-Import Bank of the United States. The termination of the agreements was initiated by the Company as it was no longer needed and was carried out at no cost to the Company. The $2.0 million domestic LSA remains in force with no changes to its terms. The interest rate under the agreements is Silicon Valley Bank’s prime rate plus 1%. The fee for the unused portion of the loans is equal to twenty-five hundredths percent (0.25%) per annum of the average unused portion of the revolving line of credit. In the event of a default by the Company under the LSA, Silicon Valley Bank may declare all amounts due under the LSA to be immediately due and payable. In addition, the line of credit is secured by substantially all of the assets of the Company’s United States based operations. The LSA includes a covenant requiring a minimum tangible net worth of $10.0 million. As of September 30, 2007 and 2006, our tangible net worth as defined in the LSA was $36.0 million and $13.5 million, respectively. There were no outstanding borrowings under the LSA’s as of September 30, 2007 and 2006.

The Company has a line of credit in the amount of Euro 250,000 (approximately $350,000) as of September 30, 2007. The line of credit accrues interest at a rate of 1.75% over a Netherlands bank’s basic interest rate (5.2% and 4.0% at September 30, 2007 and 2006, respectively). The line of credit has no fixed expiration date. The line of credit is secured by a lien on the Company’s land and buildings and on trade accounts receivable in The Netherlands. As of September 30, 2007 and 2006, there were no borrowings on the line of credit.

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6.     Long-Term Obligations

Long-term obligations include a mortgage, secured by a lien on the Company’s land and buildings in Heerde, The Netherlands and on trade accounts receivable, in The Netherlands. The principal amount of the mortgage was $503,000 and $467,000 as of September 30, 2007 and 2006, respectively. The mortgage matures on July 31, 2029. Principal payments of $5,700 per quarter are due until the mortgage is retired. Interest is paid monthly at a fixed rate of 4.1% until December 1, 2007, at which time a new fixed rate will be set based on prevailing market conditions. As of December 12, 2007, the Company is still negotiating the rate that will be in effect retroactive to December 1, 2007. There is no penalty for prepayment of the mortgage, as long as the prepayment is made at the end of a fixed rate period as defined in the mortgage agreement.

In December 2004, the Company financed a laser cutting tool purchased in the fourth quarter of fiscal 2004. The Company financed $500,000 at an interest rate of 6.55% with 48 equal monthly payments of $12,000, including principal and interest. The outstanding principal balance of this loan was $170,500 and $297,000 as of September 30, 2007 and 2006, respectively.

In October 2006, the Company financed a wide burring machine purchased in the fourth quarter of fiscal 2006. The Company financed $355,000 at an interest rate of 7.43% with 60 equal monthly payments of $7,000, including principal and interest. The outstanding principal balance of this loan was $294,500 as of September 30, 2007.

Total maturities of long term debt are $224,000 in 2008, $129,000 in 2009, $99,000 in 2010, $105,000 in 2011, $23,000 in 2012 and $388,000 thereafter.

7.     Stockholders’ Equity

In February 2007, the Company filed registration statements on Form S-1 with the Securities and Exchange Commission for the sale of 2,625,000 shares of its common stock in an underwritten public offering at a price to the public of $7.05 per share. The Company also granted the underwriters a 30-day option to purchase up to 393,750 additional shares of common stock to cover over-allotments. Net proceeds to the Company were approximately $19.4 million including the exercise of the over-allotment, net of $0.4 million of offering expenses and $1.5 million of underwriting commissions.

On April 22, 2005, the Company completed a private placement of 540,000 shares of Series A Convertible Preferred Stock, par value $0.01 per share (the “Preferred Stock”). The gross proceeds of this transaction were $2,160,000. The placement agent received commissions of 8% of the proceeds, totaling $172,800, and a non-accountable expense allowance of 2% of the proceeds, totaling $43,200. The agent also received a warrant to purchase up to 60,000 shares of our Common Stock, $0.01 par value per share (“Common Stock”), at a price of $4.67 per share. The warrants were valued at $49,200 using the Black-Scholes pricing model.

The shares of Preferred Stock were convertible at any time at the option of the holders into shares of Common Stock based upon the liquidation value, as defined, at a fixed conversion rate of $4.00 per share. In addition, all outstanding shares of Preferred Stock were to be automatically converted into shares of Common Stock in the event that the Common Stock has an average thirty-day trading price of at least $5.50 per share. The Preferred Stock was automatically converted into 540,000 shares of the Company’s common Stock on March 20, 2006.

Each holder of Preferred Stock was entitled to receive cumulative dividends at a rate of $0.32 per share per annum (or 8%) out of our legally available funds or other assets, payable semi-annually. The first dividend of $83,323 was paid in cash on October 15, 2006. As permitted under the terms of the Preferred Stock agreement, the Company elected to issue 9,375 shares of Common Stock on March 20, 2006, as payment for the final dividend of $73,854.

The Company’s stockholder rights plan authorizes the distribution of one right for each outstanding common share. Each right entitles the holder to purchase one one-hundredth of a share of Series A Participating Preferred Stock, at a purchase price of $8.50, subject to certain anti-dilution adjustments. The rights will expire 10 years after issuance and will be exercisable if (a) a person or group becomes the beneficial owner of 15% or more of the Company’s common stock or (b) a person or group commences a tender or exchange offer that would result in the offeror beneficially owning 15% or more of the Company’s common stock (a “Stock Acquisition Date”). If a Stock Acquisition Date occurs, each right, unless redeemed by the Company at $0.01 per right, entitles the holder to purchase an amount of the Company’s common stock, or in certain circumstances a combination of securities and/or

53

assets or the common stock of the acquirer, having an equivalent market value of $17.00 per right at a purchase price of $8.50. Rights held by the acquiring person or group will become void and will not be exercisable. These rights are not exercisable as of September 30, 2007.

8.     Commitments and Contingencies

License Agreements – In April 2007, the company entered into a license agreement with PST Co., LTD (PST) to market, sell, install, service and manufacture machinery and equipment for the manufacturing of photovoltaic cells that employs PECVD Technology (Licensed Product) developed by PST. Under the terms of this agreement the Company paid $0.3 million to PST in April, with an additional payment due of $0.7 million upon the development of the Licensed Product. Under the terms of the agreement PST is required to return the original payment if the development of the Licensed Product is unsuccessful.

Purchase Obligations – As of September 30, 2007, we had unrecorded purchase obligations in the amount of $7.2 million. These purchase obligations consist of outstanding purchase orders for goods and services. While the amount represents purchase agreements, the actual amounts to be paid may be less in the event that any agreements are renegotiated, cancelled or terminated.

Legal Proceedings – The Company and its subsidiaries are defendants from time to time in actions for matters arising out of their business operations. The Company does not believe that any matters or proceedings presently pending will have a material adverse effect on its consolidated financial position, results of operations or liquidity.

Operating Leases – The Company leases buildings, vehicles and equipment under operating leases. Rental expense under such operating leases was $857,000, $741,000 and $611,000 in fiscal 2007, 2006 and 2005, respectively. As of September 30, 2007, future minimum rental commitments under non-cancelable operating leases with initial or remaining terms of one year or more totaled $1,335,000, of which $541,000, $286,000, $263,000, $231,000 and $14,000 is payable in fiscal 2007, 2008, 2009, 2010 and 2011 respectively.

9.     Major Customers and Foreign Sales

One customer accounted for 13% of net revenue during fiscal 2007. One customer accounted for 17% of net revenue during fiscal 2006. No customer accounted for 10% or more of net revenue during fiscal 2005.

Our net revenues for fiscal 2007, 2006 and 2005 were to customers in the following geographic regions:

	Years Ended September 30,
	2007			2006			2005
United States	28	%		34	%		36	%
Other	0	%		1	%		4	%
Total North America	28	%		35	%		40	%
Taiwan	18	%		9	%		16	%
China	18	%		4	%		9	%
Malaysia	5	%		13	%		1	%
Other	11	%		15	%		10	%
Total Asia	52	%		41	%		36	%
Germany	6	%		13	%		6	%
Other	14	%		11	%		18	%
Total Europe	20	%		24	%		24	%
	100	%		100	%		100	%

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10.     Business Segment Information

The Company’s products are classified into two core business segments. The semiconductor and solar equipment segment designs, manufactures and markets semiconductor wafer processing and handling equipment used in the fabrication of integrated circuits, solar cells and MEMS. Also included in the semiconductor and solar equipment segment are the manufacturing support service operations and corporate expenses, except for a small portion that is allocated to the polishing supplies segment. The polishing supplies segment designs, manufactures and markets carriers, templates and equipment used in the lapping and polishing of wafer-thin materials, including silicon wafers used in the production of semiconductors.

Information concerning our business segments is as follows:

	Years Ended September 30,
	2007			2006				2005
	(dollars in thousands)
Net revenue:
Semiconductor and solar equipment	$	37,657		$	33,363			$	20,668
Polishing supplies		8,327			7,082				7,231
	$	45,984		$	40,445			$	27,899
Operating income (loss):
Semiconductor and solar equipment	$	339		$	722			$	(1,035	)
Polishing supplies		1,402			913				791
		1,741			1,635				(244	)
Interest income (expense), net		336			(37	)			70
Income (loss) before income taxes	$	2,077		$	1,598			$	(174	)
Capital expenditures:
Semiconductor and solar equipment	$	3,858		$	533			$	250
Polishing supplies		303			423				29
	$	4,161		$	956			$	279
Depreciation and amortization expense:
Semiconductor and solar equipment	$	437		$	466			$	515
Polishing supplies		269			176				160
	$	706		$	642			$	675
				As of September 30,
				2007				2006
Indentifiable assets:
Semiconductor and solar equipment				$	46,283			$	19,564
Polishing supplies					4,383				3,999
				$	50,666			$	23,563
Goodwill:
Semiconductor and solar equipment				$	89			$	89
Polishing supplies					728				728
				$	817			$	817

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The Company has manufacturing operations in the United States and The Netherlands. Revenues, operating income (loss) and identifiable assets by geographic region are as follows:

		Years Ended September 30,
		2007			2006				2005
			(dollars in thousands)
Net revenue:
United States		$	17,555		$	24,418			$	16,691
The Netherlands			28,429			16,027				11,208
		$	45,984		$	40,445			$	27,899
Operating income (loss):
United States		$	489		$	1,786			$	(458	)
The Netherlands			1,252			(151	)			214
		$	1,741		$	1,635			$	(244	)

		As of September 30,
		2007			2006
Net Long-lived Assets (excluding intangibles and goodwill)
United States		$	1,349		$	1,366
The Netherlands			4,926			1,016
		$	6,275		$	2,382

11.     Income Taxes

The components of the provision for income taxes are as follows:

		Year Ended September 30,
		2007				2006				2005
		(dollars in thousands)
Current:
Domestic federal		$	760			$	411			$	(25	)
Foreign			540				(245	)			—
Domestic state			80				114				110
			1,380				280				85
Deferred:
Domestic federal			(1,710	)			—				—
Foreign			—				—				—
Domestic state			(10	)			—				—
			(1,720	)			—				—
		$	(340	)		$	280			$	85

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A reconciliation of actual income taxes to income taxes at the expected United States federal corporate income tax rate of 34 percent is as follows:

		Year Ended September 30,
		2007				2006				2005
		(dollars in thousands)
Tax provision (benefit) at the statutory federal rate		$	706			$	543			$	(59	)
Effect of permanent book-tax differences			71				(99	)			30
State tax provision			44				75				44
Valuation allowance for net deferred tax assets			(1,183	)			(222	)			81
Other items			22				(17	)			(11	)
		$	(340	)		$	280			$	85

Deferred income taxes reflect the tax effects of temporary differences between the carrying value of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The tax effects of temporary book-tax differences that give rise to significant portions of the deferred tax asset and deferred tax liability are as follows:

		Years Ended September 30
		2007				2006				2005
		(dollars in thousands)
Deferred tax assets - current:
Capitalized inventory costs		$	320			$	205			$	121
Inventory write-downs			460				412				586
Deferred profit			740				377				223
Accruals and reserves not currently deductible			570				467				319
			2,090				1,461				1,249
Valuation allowance			(400	)			(1,461	)			(1,249	)
Deferred tax assets - current net of valuation allowance		$	1,690			$	—			$	—
Deferred tax assets (liabilities) - non-current:
Stock options expense		$	70			$	17			$	—
Federal net operating losses			—				—				552
State net operating losses			180				172				136
Book vs. tax depreciation and amortization			(170	)			(17	)			(82	)
			80				172				606
Valuation allowance			(50	)			(172	)			(606	)
Deferred tax assets - current net of valuation allowance		$	30			$	—			$	—

Changes in the deferred tax valuation allowance are as follows:

		Year Ended September 30,
		2007				2006				2005
		(dollars in thousands)
Balance at the beginning of the year		$	1,633			$	1,855			$	1,768
Additions (subtractions) to valuation allowance			(1,183	)			(222	)			87
Balance at the end of the year		$	450			$	1,633			$	1,855

The Company has approximately $2.6 million of Arizona state net operating loss carryforwards at September 30, 2007, which expire in varying amounts between 2008 and 2012. These net operating losses have been fully reserved.

SFAS No. 109 “Accounting for Income Taxes” requires that a valuation allowance is recognized if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax asset will not be realized. Each quarter the valuation allowance is re-evaluated. During fiscal 2007, continued improvement in both the Company’s earnings history and its prospects for the future resulted in a $1.2 million lower estimate of the

57

amount of deferred assets that more likely than not will be unrealizable. Tax payments of $1.3 million were made during 2007. During fiscal 2007, the Company also recorded an increase of $0.5 million in deferred tax assets for items that meet the more likely than not criteria for recognition under SFAS No. 109.

12.     Restructuring Charge

In June 2006, Amtech adopted a plan to consolidate the manufacturing of its automation product line into facilities already used to manufacture diffusion furnaces. Amtech’s automation products are often sold in conjunction with the sale of new diffusion furnaces. As a result of this decision, the company notified certain personnel of the termination date and severance and recorded a restructuring charge of $190,000, of which $88,000 had been paid as of September 30, 2006. These charges are presented as a separate line item on the Consolidated Statements of Operations.

13.     Subsequent Event – Acquisition

On October 8, 2007, the Company acquired, through its wholly-owned subsidiary, Tempress Holding B.V., 100% of the voting equity, in R2D Ingenierie, or R2D, a solar cell and semiconductor automation equipment manufacturing company, located near Montpellier, France. R2D provides solutions to the solar and semiconductor industries. The purpose of the acquisition was to expand the Company’s automation products which are used in the semiconductor manufacturing and solar diffusion processes. The acquisition of the technology and business of R2D enhances the growth strategy by allowing the Company to increase sales by offering an integrated system under the Tempress brand to the solar industry.

The aggregate purchase price is based on the cash consideration paid at closing of $5.5 million plus estimated acquisition costs of $0.6 million, including cost of legal representation and due diligence. Cash contingent payments of $1.6 million to be paid to sellers upon fulfillment of certain requirements have been deposited in an escrow account. The amount of future contingent payments earned will be allocated primarily to goodwill. The assets of R2D principally consist of intellectual property and technology, reseller relationships, customer contracts, trademarks, non-compete agreements, inventories and other tangible property used in connection with the acquired business. Liabilities assumed include current liabilities, loans, obligations under certain contracts, leases, purchase orders and warranty claims for certain products and services under warranty as of the date of the acquisition.

The valuation of acquired assets is preliminary and dependent upon final valuation of assets acquired, including valuation of intangible assets which was determined with the assistance of an independent third-party consultant. The fair value of intangible assets was determined by a valuation approach that estimates the future economic benefit stream of the asset. This benefit stream was then discounted to present value with an appropriate risk-adjusted discount rate.

The allocation of the purchase price to the fair value of the assets acquired and liabilities assumed at the date of acquisition is as follows (dollars in thousands):

Assets Acquired:
Current Assets		$	5,138
Property, plant & equipment			103
Intangible assets			2,871
Total assets acquired			8,112
Liabilities Assumed
Current Liabilities			1,931
Long-term liabilities			80
Total liabilities assumed			2,011
Net assets acquired		$	6,101

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14.     Subsequent Event – Public Offering

In November 2007, the Company filed registration statements on Form S-1 with the Securities and Exchange Commission for the sale of 2,500,000 shares of its common stock in an underwritten public offering at a price to the public of $14.41 per share. The Company also granted the underwriters a 30-day option to purchase up to 375,000 additional shares of common stock to cover over-allotments. Net proceeds to the Company were approximately $33.5 million, net of approximately $0.4 million of offering expenses and $2.2 million of underwriting commissions, excluding the possible exercise of the over-allotments. We intend to use the net proceeds from this offering for working capital and other general corporate purposes. Pending application of these proceeds, we intend to invest the net proceeds in short-term, interest bearing investment grade securities.

15.      Selected Quarterly Data (Unaudited)

		First			Second			Third			Fourth
		Quarter			Quarter			Quarter			Quarter
		(in thousands, except per share amounts)
Fiscal Year 2007:
Revenue		$	9,451		$	10,539		$	12,874		$	13,120
Gross margin		$	2,392		$	2,868		$	3,424		$	4,126
Net income		$	6		$	262		$	1,010		$	1,139
Net income per share:
Basic		$	0.00		$	0.05		$	0.16		$	0.17
Shares used in calculation			3,476			5,193			6,498			6,514
Diluted		$	0.00		$	0.05		$	0.15		$	0.17
Shares used in calculation			3,511			5,255			6,575			6,654
Fiscal Year 2006:
Revenue		$	7,914		$	10,892		$	10,351		$	11,288
Gross margin		$	2,537		$	2,737		$	2,643		$	2,658
Net income (loss)		$	471		$	182		$	168		$	497
Net income (loss) per share:
Basic		$	0.16		$	0.05		$	0.05		$	0.14
Shares used in calculation			2,708			2,881			3,437			3,475
Diluted		$	0.14		$	0.05		$	0.05		$	0.14
Shares used in calculation			3,387			3,481			3,521			3,518

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

Our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), has carried out an evaluation of the effectiveness of our disclosure controls and procedures as of September 30, 2007, pursuant to Exchange Act Rules 13a-15(e) and 15(d)-15(e). Based upon that evaluation, our CEO and CFO have concluded that as of such date, our disclosure controls and procedures in place were effective as of the end of the period covered by this annual report.

There have been no changes in our internal controls over financial reporting during the fourth quarter of fiscal 2007 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

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ITEM 9B. OTHER INFORMATION

None.

PART III

Pursuant to Paragraph G(3) of the General Instructions to Form 10-K, the information required by Part III of Form 10_K are incorporated by reference to Amtech’s Definitive Proxy Statement to be filed with the Securities and Exchange Commission in connection with its 2008 Annual Meeting of Stockholders (the “Proxy Statement”).

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this item is incorporated herein by reference the Proxy Statement, which will be filed with the Securities and Exchange Commission within 120 days of the end of our fiscal year.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is incorporated herein by reference the Proxy Statement, which will be filed with the Securities and Exchange Commission within 120 days of the end of our fiscal year.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by this item is incorporated herein by reference the Proxy Statement, which will be filed with the Securities and Exchange Commission within 120 days of the end of our fiscal year.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is incorporated herein by reference the Proxy Statement, which will be filed with the Securities and Exchange Commission within 120 days of the end of our fiscal year.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

The information required by this item is incorporated herein by reference the Proxy Statement, which will be filed with the Securities and Exchange Commission within 120 days of the end of our fiscal year.

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) (1)    The consolidated financial statements required by this item are set forth on the pages indicated at Item 8.

	(2)		All financial statement schedules are omitted because they are either not applicable, or because the required information is shown in the consolidated financial statements or notes thereto.
	(3)		Exhibits: The response to this section of Item 15 is included in the Exhibit Index of the Annual Report and is incorporated herein by reference.

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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.

	AMTECH SYSTEMS, INC.
December 12, 2007	By:		/s/ Bradley C. Anderson
			Bradley C. Anderson, Vice President –
			Finance and Chief Financial Officer

     Pursuant to the requirements of the Securities Exchange Act of 1934, this report on Form 10-K has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:

SIGNATURE		TITLE		DATE
*		Chairman of the Board,		December 12, 2007
Jong S. Whang		President and Chief Executive Officer
		(Principal Executive Officer)
/s/ Bradley C. Anderson		Vice President – Finance		December 12, 2007
Bradley C. Anderson		and Chief Financial Officer
		(Principal Financial Officer)
*		Chief Accounting Officer		December 12, 2007
Robert T. Hass		(Principal Accounting Officer)
*		Director		December 12, 2007
Michael Garnreiter
*		Director		December 12, 2007
Robert F. King
*		Director		December 12, 2007
Brian L. Hoekstra
*		Director		December 12, 2007
Alfred W. Giese

 

*By:		/s/ Bradley C. Anderson
		Bradley C. Anderson, Attorney-In-Fact**

____________________
**By authority of the power of attorney filed as Exhibit 24 hereto.

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EXHIBIT INDEX
Exhibit
No.		Description		Method of Filing
3.1		Articles of Incorporation		A
3.2		Articles of Amendment to Articles of Incorporation, dated April 27, 1983		A
3.3		Articles of Amendment to Articles of Incorporation, dated May 19, 1987		B
3.4		Articles of Amendment to Articles of Incorporation, dated May 2, 1988		C
3.5		Articles of Amendment to Articles of Incorporation, dated May 28, 1993		D
3.6		Articles of Amendment to Articles of Incorporation, dated March 14, 1999		E
3.7		Certificate of Designations, Preferences and Privileges of the Series A Convertible Preferred Stock, dated April 21, 2005		M
3.8		Amended and Restated Bylaws		F
4.1		Rights Agreement dated May 17, 1999		G
4.2		Form of Subscription Agreement for the Series A Convertible Preferred Stock		M
10.1		Amended and Restated 1995 Stock Option Plan		H
10.2		Non-Employee Directors Stock Option Plan		I
10.3		Amendment to Non-Employee Directors Stock Option Plan effective July 8, 2005		O
10.4		Employment Agreement with Robert T. Hass, dated May 19, 1992		J
10.5		1998 Employee Stock Option Plan (Amended as of March 29, 2002)		K
10.6		Asset Purchase Agreement, dated May 3, 2004, by and between Kokusai Semiconductor Equipment Corporation and the Company.		L
10.7		Amendment, dated June 25, 2004, to the Asset Purchase Agreement by and between Kokusai Semiconductor Equipment Corporation and the Company.		L
10.8		Amendment, dated July 1, 2004, to the Asset Purchase Agreement by and between Kokusai Semiconductor Equipment Corporation and the Company.		L
10.9		Asset Purchase Agreement, dated May 3, 2004, by and between Kokusai Electric Europe GmbH and the Company.		L
10.10		Amendment, dated June 25, 2004, to the Asset Purchase Agreement by and between Kokusai Electric Europe GmbH and the Company.		L
10.11		Warrant to Purchase Common Stock, dated April 22, 2005		O
10.12		Loan and Security Agreement (Domestic), dated April 7, 2006, between Silicon Valley Bank and the Company.		Q
10.13		Loan and Security Agreement (EXIM), dated April 7, 2006, between Silicon Valley Bank and the Company.		Q
10.14		Export-Import Bank of the United States Working Capital Guarantee Program Borrower Agreement, dated April 7, 2006.		Q
10.15		Third Amendment to Lease, dated as of August 11, 2006, between Wakefield Investments, Inc. and Bruce Technologies, Inc.		R
10.16		2007 Employee Stock Incentive Plan		S
10.17		Sale Agreement, dated March 15, 2007, for purchase of manufacturing facility Located in Vassen, The Netherlands by Tempress Holdings B.V. from Mr. F. H. Van Berlo.		T
10.18		Employment Agreement with J.S. Whang dated April 13, 2007		T
10.19		Stock Purchase and Sale Agreement, by and among Tempress Holdings, B.V., R2D Ingenierie SAS and the Shareholders of R2D Ingenierie SAS, dated as of October 8, 2007.		U
21		Subsidiaries of the Registrant		*
23.1		Consent of Independent Registered Public Accounting Firm - Mayer Hoffman McCann P.C.		*
24		Powers of Attorney		*

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31.1			Certification Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as Amended		*
31.2			Certification Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as Amended		*
32.1			Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002		*
32.2			Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002		*

____________________

*		Filed herewith.
A		Incorporated by reference to Amtech’s Form S-1 Registration Statement No. 2-83934-LA.
B		Incorporated by reference to Amtech’s Annual Report on Form 10-K for the year ended September 30, 1987.
C		Incorporated by reference to Amtech’s Annual Report on Form 10-K for the year ended September 30, 1988.
D		Incorporated by reference to Amtech’s Form S-1 Registration Statement (File No. 33-77368).
E		Incorporated by reference to Amtech’s Annual Report on Form 10-K for the year ended September 30, 1999.
F		Incorporated by reference to Amtech’s Annual Report on Form 10-K for the year ended September 30, 1991.
G		Incorporated by reference to Amtech’s Current Report on Form 8-A, filed with the Securities and Exchange Commission on May 17, 1999.
H		Incorporated by reference to Amtech’s Form S-8 Registration Statement (related to the Amended and Restated 1995 Stock Option Plan), filed with the Securities and Exchange Commission on August 9, 1996.
I		Incorporated by reference to Amtech’s Form S-8 Registration Statement (related to the Non-Employee Director Stock Option Plan), filed with the Securities and Exchange Commission on August 9, 1996.
J		Incorporated by reference to Amtech’s Annual Report on Form 10-K for the year ended September 30, 1993.
K		Incorporated by reference to Amtech’s Form S-8 Registration Statement (related to the 1998 Employee Stock Option Plan), filed with the Securities and Exchange Commission on February 11, 2003.
L		Incorporated by reference to Amtech’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on July 15, 2004.
M		Incorporated by reference to Amtech’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 28, 2005.
N		Incorporated by reference to Amtech’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 24, 2005.
O		Incorporated by reference to Amtech’s Annual Report on Form 10-K for the year ended September 30, 2005.
P		Incorporated by reference to Amtech’s Annual Report on Form 10-K for the year ended September 30, 2006.
Q		Incorporated by reference to Amtech’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on April 12, 2006.
R		Incorporated by reference to Amtech’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2006.
S		Incorporated by reference to Amtech’s Proxy Statement for its 2007 Annual Shareholders’ Meeting, filed with the Securities and Exchange Commission on April 24, 2007.
T		Incorporated by reference to Amtech’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2007.
U		Incorporated by reference to Amtech’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 11, 2007.

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