CFM TECHNOLOGIES INC, 10-K, 1998-01-28

CFM TECHNOLOGIES INC
10-K, 1998-01-28
SPECIAL INDUSTRY MACHINERY, NEC

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

FOR ANNUAL AND TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934

(Mark One)

[ X ] Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended OCTOBER 31, 1997.

[ ] Transition Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 For the transition period from
__________________ to ___________________

Commission File No. 0-27498

CFM TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)

PENNSYLVANIA 23-2298698
------------ ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)

1336 ENTERPRISE DRIVE, WEST CHESTER, PENNSYLVANIA 19380
------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (610) 696-8300
--------------

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

COMMON STOCK, NO PAR VALUE
--------------------------
Title of Class

Indicate by check mark whether the Registrant (1) has filed all reports to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ___

Indicate by checkmark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. _X_

The number of outstanding shares of the Registrant's Common Stock, no par
value per share, on January 20, 1998 was 7,913,588. In making such calculation,
Registrant is not making a determination of the affiliate or non-affiliate
status of any holders of shares of Common Stock.

The aggregate market value of the voting stock held by non-affiliates of
the Registrant (computed by reference to the closing price of such stock on The
Nasdaq Stock Market on January 20, 1998 of $17.4375) was approximately
$108,282,000.

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the Proxy Statements for the Annual Meeting of Shareholders to
be held in March 1998 are incorporated herein by reference in Part III, Items
10,11,12 and 13.

<PAGE>

TABLE OF CONTENTS

ITEM NO. PAGE
- -------- ----
PART I

1. Business ............................................................... 3
2. Properties .............................................................29
3. Legal Proceedings ......................................................30
4. Submission of Matters to a Vote of Security Holders ....................30
Executive Officers of the Registrant....................................31

PART II

5. Markets for Registrant's Common Equity and Related Stockholder
Matters ..............................................................33
6. Selected Financial Data ................................................34
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations ................................................36
8. Financial Statements and Supplementary Data ............................43
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure .................................................43

PART III

10. Directors and Executive Officers of the Registrant ....................44
11. Executive Compensation ................................................44
12. Security Ownership of Certain Beneficial Owners and
Management ..........................................................44
13. Certain Relationships and Related Transactions.........................44

PART IV

14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K .........................................................45

Signatures ............................................................... F-23
Exhibits Index .......................................................... E-1

<PAGE>

PART I

ITEM 1. BUSINESS

CFM Technologies, Inc. and subsidiaries ("CFM" or the "Company") designs,
manufactures and markets advanced wet processing equipment for sale to the
worldwide semiconductor and flat panel display ("FPD") industries. The Company
believes that its patented Full-Flow(TM) enclosed processing and
Direct-Displacement(TM) drying technologies enable it to provide wet processing
systems that address a variety of limitations inherent in conventional systems,
including wet benches and spray tools, resulting in significantly lower cost of
ownership ("COO") for the Company's Full-Flow systems. The Company's customers
include: GEC Plessey, LG International (America) and related entities ("LG"),
Motorola, National Semiconductor, Samsung, SGS-Thomson, Siemens, Texas
Instruments, Tower Semiconductor, and International Business Machines ("IBM").

INDUSTRY BACKGROUND

Market Overview

Over the past two decades, increasing demand for integrated circuits
("ICs") has resulted primarily from the growth of the personal computer and data
communication markets, as well as the emergence of new markets such as wireless
communications, mobile computing and multimedia and the addition of
microprocessor control to many common consumer products such as automobiles,
kitchen appliances and audio/video equipment. In large part, this demand has
been driven by the semiconductor industry's ability to provide increasingly more
complex, higher performance ICs while steadily reducing the cost per function
with lower power consumption. These improvements in the ratio of price to
performance have been driven by advancements in semiconductor process
technology, which have enabled the cost-effective production of high density ICs
with linewidth below 0.5 micron.

As demand for ICs has grown, semiconductor and FPD manufacturers have
increased capacity by expanding and updating existing fabrication facilities
("fabs") and constructing new fabs. This expansion has historically exhibited
strong cyclical characteristics, and continues to do so. For example, beginning
in late 1995 and during 1996, many semiconductor manufacturers experienced a
reduction in order growth and, in a few instances, a reduction in overall
orders. These events caused certain semiconductor manufacturers to postpone or
cancel equipment deliveries to previously planned expansion or new fab
construction projects, providing evidence of the continuing cyclical nature of
the industry. Demand for semiconductor devices stabilized early in 1997. Recent
evidence of excess semiconductor device production capacity, especially in
dynamic random access memory ("DRAM") chips, may mark another period of reduced
demand for semiconductor capital equipment. However, according to VLSI Research
Inc. ("VLSI"), the semiconductor capital equipment market has grown through
these periodic cycles from an estimated $2.2 billion in 1980 to $37.6 billion in
1997.

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The increasing complexity of ICs has resulted in an increase in both the
number and cost of process tools (such as steppers, etchers, furnaces and wet
processors) required to manufacture semiconductors. In a typical fab in the
1980s, the cost of equipment represented approximately 50-55% of the total
facility costs. Today, the total cost of an advanced fab can substantially
exceed $1 billion, of which equipment costs can account for over 80%.
Semiconductor manufacturers place great pressure on process equipment
manufacturers to decrease the COO of their products. The principal elements of
COO are yield, throughput, capital costs and direct costs. Yield is primarily
determined by contamination levels and process uniformity. Throughput is
primarily a function of the time required to complete a process cycle and the
handling time between process steps. Capital costs include the cost of
acquisition and installation of the process equipment. Direct costs primarily
include consumables used in the manufacturing process and costs of cleanroom
space occupied by the equipment. Semiconductor device manufacturers must also
address environmental costs such as water usage and costs related to the control
and disposal of chemical waste and emissions associated with operating a fab.
Measuring and maintaining an acceptable level of COO becomes increasingly
challenging as manufacturing processes become more complex and process
tolerances narrow.

The market for FPDs has grown significantly in recent years as the result
of the increasing popularity of portable computers and other electronic devices
which utilize screens and other types of displays to provide information in
digital format and graphical displays, to the end user. As consumers demand
increasingly smaller and lighter electronic devices with improved functionality,
the demand for FPDs continues to increase due to inherent advantages over
cathode ray tubes ("CRTs") with respect to size, weight and power consumption.
As the cost of FPDs declines, the uses of FPDs are expected to increase.
Computer applications accounted for over half of the total number of FPDs sold
in 1995. According to Dataquest, Inc., a market research company, the overall
market for FPDs is projected to increase from $4.7 billion in 1995 to $15.6
billion in 1998. Users of displays require high resolution which translates to
increased device density on the back of the thin glass screen. In order to
support the required device density and still allow substantial light
transmission through the screen (brightness), significant reductions in feature
size will be required. The Company believes that the superior etch uniformity
and cleaning performance possible using a Full-Flow system may enable
manufacturers to meet the combined goal of device density and brightness.

Wet Processing in Semiconductor Manufacturing

The manufacture of semiconductors requires a large number of complex
process steps during which layers of electrically insulating or conducting
materials are created or deposited on the surface of a silicon wafer. Before and
after many of these steps, it is necessary to clean, etch, strip or otherwise
condition the surface of the wafer in order to remove unwanted material or
surface contamination in preparation for a subsequent process step. SEMATECH, a
consortium of semiconductor manufacturers, has estimated that over 300
fabrication steps are required to manufacture advanced logic ICs, and that
approximately 55 of these steps are accomplished by wet processing.

The following table identifies the typical wet processing steps in
semiconductor manufacturing.

CRITICAL CLEANING CRITICAL ETCHING PHOTORESIST STRIP
APPLICATIONS APPLICATIONS APPLICATIONS
------------ ------------ ------------

Initial wafer clean Silicon oxide etch Aqueous chemistry resist
Pre-diffusion clean Polysilicon etch strip/post-ash clean
Pre-oxidation clean Silicon nitride etch Solvent chemistry resist
Pre-thin films strip/post-ash clean
deposition clean (back end)

<PAGE>

Post-CMP clean
Solvent chemistry clean
(back end)

The above wet processing steps have traditionally been accomplished using
wet benches and spray tools. Advanced wet benches utilize a succession of open
chemical baths and extensive robotic automation to move wafers from one chemical
or rinse bath to the next. Spray tools subject wafers to sequential spray
applications of chemicals as the wafers are spun inside an enclosed chamber.

Like semiconductors, FPDs are manufactured using numerous process steps,
including photolithography, deposition, etching and cleaning. However, unlike
semiconductor wafers, each of which may contain several hundred individual ICs,
a single FPD substrate may contain a few as two laptop computer displays.
Therefore, defects in the manufacturing process tend to have a much greater
impact on FPD yields than on semiconductor yields.

The Company believes that these conventional wet processing methods are
subject to a number of inherent limitations, including:

Particle Contamination. Submicron ICs and FPD substrates are extremely
sensitive to small amounts of particle contamination which can result in poor
device performance or even failure. As device geometries become smaller, the
reduction of particle contamination has become an increasingly critical factor
in maximizing yield. Open-bath wet benches are exposed to the cleanroom
environment and therefore are susceptible to external contamination. Since
particles tend to reside on the surfaces of liquids due to surface tension, the
movement of wafers in and out of liquids can result in the transfer of particles
to the wafer surfaces through a "skimming" effect. The tendency to add particles
from air-liquid transitions is inherent in wet benches due to multiple
immersions and withdrawals and in spray processing where each spray droplet
striking the wafer surface can act as a separate miniature immersion and
withdrawal.

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Watermark Defects and Native Oxide Growth. Both wet benches and spray tools
subject the surface of wafers or substrates to repeated wetting and evaporative
drying, creating watermark defects on the surface that can significantly impact
device or FPD performance and interfere with subsequent process steps.

Process Control Limitations. Process liquids in wet benches and spray
tools are subject to evaporation and absorption of atmospheric gases. As a
result, it is difficult to achieve precise repeatability of process results.
Additionally, wafers and FPD substrates in a wet bench must be robotically
transferred from bath to bath through the cleanroom atmosphere. This gap in
processing during transport adds variability due to the effects of wafer and
substrate exposure to the cleanroom atmosphere.

Large Physical Size. The cost of cleanroom space is a significant
component in the overall COO calculation for a specific piece of equipment. Wet
benches configured for the multiple-step wet processes required by many
manufacturers can be up to 30 feet in length. Increases in process complexity or
in wafer or FPD substrate size will likely require even larger wet benches.

Environmental Impact. Due to the large volume of the open baths which
comprise a wet bench and the need for multiple wet processing steps to
manufacture increasingly complex ICs, wet benches typically consume large
quantities of water during processing. Water costs represent a significant
portion of the total cost of cleaning. Additionally, in many wet bench
processes, large amounts of chemicals are utilized. The open nature of the baths
in a typical wet bench necessitates expensive ventilation and air filtration
systems in order to remediate chemical fume emissions. As a result,
municipalities and environmental authorities are increasingly concerned by water
consumption and chemical fume emissions by fabs.

Due to the continuing reduction of semiconductor device geometries and the
escalating cost of leading edge fabs, the Company believes that semiconductor
and FPD manufacturers are becoming increasingly sensitive to the foregoing
limitations inherent in conventional wet processing methods.

THE CFM SOLUTION

The Company's systems are based on its proprietary Full-Flow wet processing
technology and are used to perform various cleaning, stripping and etching
process steps in the manufacture of semiconductors and FPDs. In the Company's
Full-Flow wet processing system, up to 150 wafers or 50 substrates automatically
load into a fully-enclosed, flow-optimized vessel that has a lower fluid inlet
and an upper fluid outlet. The Full-Flow system requires different vessel sizes
depending upon whether wafers or FPD substrates are being processed. Once a
selected process is begun, the vessel is completely filled with fluid at all
times, with fluids flowing through the vessel one directly after another without
exposing the wafers or substrates to air.

6
<PAGE>

The Company believes that its patented Full-Flow enclosed processing and
Direct-Displacement drying technologies result in superior process performance
and lower COO by offering the following advantages over conventional wet
processing systems:

Reduced Particle Contamination. Full-Flow processing takes place in a
fully-enclosed processing vessel which isolates the wafers or substrates from
the external cleanroom environment and associated contaminants. Additionally,
particle contamination through particle skimming is substantially reduced. Since
a Full-Flow system is capable of directly displacing one chemical or rinse step
with the next without draining the vessel, it can eliminate the air-liquid
interfaces (where particles tend to reside) that normally occur in wet benches
and spray tools. The wafers or substrates are kept completely immersed in fluid
until they are ready to be dried using the Company's patented in situ
Direct-Displacement drying technology.

Substantial Elimination of Watermark Defects and Native Oxide Growth. The
formation of watermarks is substantially eliminated through the prevention of
water evaporation from the wafer or substrate surface. Once the chemical
treatment of the wafers or substrates is completed, drying is accomplished using
CFM's patented Direct-Displacement drying technology. With this technique, the
final rinse water is directly displaced with highly purified isopropyl alcohol
("IPA") vapor and substantially all water is forced off the surface of the wafer
before it is exposed to an air environment. Additionally, native oxide growth is
suppressed by degassifying the water immediately before it enters the vessel.
Since the vessel itself is totally enclosed, the ultra pure water in the vessel
is not able to absorb oxygen, carbon dioxide and other gases from the cleanroom
environment. As a result, the gas content of the water at the surface of the
wafers or substrates is much lower than that typically found in a wet bench or
spray tool.

Tight Process Control. Process precision and repeatability result in large
part from the ability to control accurately the physical and chemical properties
of the processing liquids as well as transitions between process steps.
Full-Flow processing is performed in a completely enclosed vessel, thereby
substantially reducing variability of the processing liquids such as water and
chemical evaporation and absorption of atmospheric gases. Additionally, because
one process liquid directly displaces the previous one, there is no exposure to
the cleanroom atmosphere between process steps.

Cleanroom Space Savings. The Full-Flow system has been designed to consume
a minimum amount of cleanroom space. System support modules can be located
outside the cleanroom and away from the vessel module. In many fabs, this means
that these support modules can be located in the basement, further reducing the
amount of square footage that is required on the main floor of the fab where
space is at a premium. A dual vessel Full-Flow system capable of processing 150
8-inch wafers in each of two vessels requires only 13 linear feet of cleanroom
wall space and no direct usage of cleanroom floor space when flush-mounted. This
is significantly less than the space requirements of a wet bench with

7
<PAGE>

lesser processing capacity, which the Company believes can require up to 350
square feet of total cleanroom floor space and approximately 35 linear feet of
cleanroom wall space.

Environmental Advantages. The Company believes that the Full-Flow system
utilizes less than one-half of the water required by traditional wet bench
systems performing similar processing steps. Additionally, most of the water in
wet bench systems flows around the wafer carrier rather than across the surface
of the wafers. In the Company's flow-optimized Full-Flow systems, substantially
less water is lost as bypass flow. The fully-enclosed Full-Flow system also
reduces the amount of process chemicals consumed and the equipment and related
costs of remediation of chemical fume emissions associated with traditional wet
processing.

STRATEGY

The Company's objective is to become a leading supplier of advanced wet
processing equipment to the worldwide semiconductor and FPD industries. The
Company intends to achieve this objective by focusing on the following key
elements of its strategy.

Increase Current Market Share. The Company seeks to continue to expand its
share of the semiconductor critical cleaning and etching wet processing market
through significant expansion of its sales and marketing and customer
satisfaction efforts. The Company also intends to continually improve its
existing Full-Flow platform in order to offer enhanced technical capabilities
and lower COO benefits for currently served critical wet processing
applications. For example, in April 1996, the Company shipped a new version of
its Full-Flow system that doubled the throughput and capital productivity of its
predecessor system by enabling the processing of up to 100 8-inch wafers in a
single vessel. Subsequently, in July 1996, the Company shipped the first
fully-automated Full-Flow system capable of processing 370mm X 470mm FPD
substrates to a customer in East Asia. In November of 1996, the Company shipped
an enhanced version of its Full-Flow 8100 wet processing system designed
specifically for high throughput resist stripping applications. In May of 1997
the Company shipped the first fully-automated Full-Flow system capable of
processing 590mm X 670mm FPD substrates to a customer in East Asia.

Broaden Semiconductor Market Penetration. The Company intends to leverage
its Full-Flow platform to address additional wet processing applications in the
semiconductor manufacturing process where it believes its proprietary Full-Flow
technology can provide important benefits over competing wet processing
technologies. By basing new process applications on this platform, the Company
is able to focus primarily on the development and optimization of each
application's process recipes. The Company believes this approach significantly
reduces the time and cost associated with entering new wet processing market
segments. Additional semiconductor wet processing applications identified by the
Company include solvent-based cleaning and photoresist

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stripping, in which CFM's fully-enclosed Full-Flow processing vessel would
provide the important benefit of controlling chemical fume emissions.

Further Penetrate FPD Market. The Company believes that its Full-Flow
platform is particularly well-suited for cleaning and precise etching
applications in the manufacture of FPDs due to its advanced process
capabilities, its significantly lower use of water and chemicals relative to
comparable wet bench processes, its ability to successfully process very large
substrates and its substantially smaller footprint which saves increasingly
valuable cleanroom floor space. The Company believes that the FPD market
represents an opportunity for increasing sales of its systems.

Focus on Customer Satisfaction. The Company believes that its commitment to
customer satisfaction has been a critical factor in its success to date. To
ensure a high level of customer satisfaction, the Company provides comprehensive
customer service and support, thorough customer training and ongoing process
consultation. The Company has already developed a comprehensive customer service
and support organization, and has invested in this area by locating direct sales
and service staff in Europe in 1996 and in East Asia in 1997. The Company also
intends to continue to increase the utilization of its applications laboratory
to design and test new processes and equipment features. Finally, the Company
has provided a Full-Flow system completely dedicated to training the Company's
customers and employees at its West Chester headquarters.

Continue Commitment to Worldwide Markets. The Company believes that its
long-term success is substantially dependent on its ability to compete on a
worldwide basis. As such, the Company intends to continue to focus on expending
its sales activities in each of the primary worldwide markets for semiconductor
and FPD capital equipment. To date, the Company has achieved considerable
success in selling to customers outside the United States, with international
sales accounting for over 60% of total sales in the previous two fiscal years.

PRODUCTS

The Company's systems are based on its proprietary Full-Flow wet processing
technology and are used to perform various cleaning and etching process steps in
the manufacture of semiconductors and FPDs.

The Full-Flow Product Platform. The Company's proprietary
Direct-Displacement drying technology is embodied in its Full-Flow platform,
which principally consists of a fully-enclosed processing vessel incorporating
megasonic technology and associated systems software, hardware and control
electronics. Megasonic technology utilizes high frequency sonic energy to
enhance particle removal from the surface of semiconductor wafers and FPD
substrates during wet processing, enabling a quicker process cycle and a
significant reduction in the quantity of process chemicals used. The Company
believes that its Full-Flow platform offers significant improvements in process
performance and a lower COO relative to competing technologies. Conventional wet
bench

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processes used for many wet processing applications rely on a succession of open
chemical baths and extensive robotic automation to move semiconductor wafers or
FPD substrates from one chemical bath to the next, which exposes them to
contamination.

In the Company's Full-Flow system, wafers or FPD substrates are loaded
automatically into a fully-enclosed flow-optimized processing vessel that has a
lower fluid inlet and an upper fluid outlet. They are completely isolated from
cleanroom air and accompanying contaminants as a succession of process fluids
are introduced into the processing vessel one directly after another, flowing
over the wafers or FPD substrates to complete the desired process application.
Once processing is completed, wafers or FPD substrates are dried in situ using
the Company's patented Direct-Displacement drying process. With this technique,
the final rinse water is directly displaced with highly purified IPA vapor and
substantially all water is forced off the surface of the wafers or substrates
before they are exposed to an air environment. This process substantially
eliminates evaporative drying defects such as watermarks, inhibits native oxide
growth and significantly reduces particle contamination. In competing
technologies, wafers or substrates are exposed to intermediate evaporative
drying within the cleanroom atmosphere prior to the completion of the final
drying process. The optimized flow characteristics of the Full-Flow processing
vessel and the advanced process control and monitoring capabilities of the
Full-Flow platform provide process uniformity and repeatability. Also, the
Company's Full-Flow systems can be flush-mounted in the cleanroom wall, with the
majority of the floor space needed by the system components located outside the
cleanroom environment. Due to this flush-mounting and the Full-Flow system's
comparatively smaller size, it requires significantly less expensive cleanroom
floor space than competing wet bench systems. The Company's Full-Flow systems
are based on a modular design and can be configured to accomplish a broad range
of wet processing applications using a variety of process and support modules
offered by the Company. By basing new process applications on its proprietary
Full-Flow platform, the Company can focus primarily on the development and
optimization of each application's process recipes. The Company believes this
approach significantly reduces the time and cost associated with developing new
products to address additional market opportunities.

The following tables list the Company's product offerings.

CFM FULL-FLOW PLATFORM CONFIGURATIONS

FULL-FLOW MARKETS CONFIGURATION CAPACITY LIST PRICE RANGE
- ----------------- ------------- -------- ----------------
Semiconductor .......... Single vessel 50 wafer $1.2 - 1.5 million
Single vessel 100 wafer $1.4 - 1.7 million
Dual vessel 100 wafer $1.8 - 2.3 million
Dual vessel 200 wafer $2.2 - 2.7 million

Flat panel display ..... Single vessel 50 panel $1.5 - 2.8 million
Dual vessel 100 panel $2.3 - 4.1 million

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Semiconductor Manufacturing Applications

The Company first introduced its Full-Flow systems for use in semiconductor
manufacturing research and development facilities in 1988, and shipped its first
system for use in semiconductor production lines in 1990. To date, the Company
has sold over 120 Full-Flow systems to more than 30 manufacturers. Full-Flow
systems can currently be configured with either one or two vessels, each of
which can be designed to accommodate 5-inch, 6-inch or 8-inch wafers.

A flush-mounted Full-Flow system configured with dual processing vessels
requires approximately 170 square feet of total floor space and approximately 13
linear feet of cleanroom wall space. Assuming similar throughput capabilities
and the same wet process, the Company believes that a competing wet bench system
can require up to 350 square feet of total cleanroom floor space and
approximately 35 linear feet of cleanroom wall space. Additionally, the Company
believes that its Full-Flow systems can typically achieve a greater than 50%
reduction in the usage of water and chemicals compared to wet benches performing
similar applications. List prices for the Company's Full-Flow systems offered
for sale to the semiconductor industry range from $1.2 million to over $2.7
million. Automation options and custom system configurations are provided at
additional cost.

SEMATECH has estimated that up to 300 fabrication steps are required to
manufacture advanced logic ICs and that approximately 50 of these steps are
accomplished by wet processing. The following table identifies the typical wet
processing steps in semiconductor manufacturing and indicates those performed by
the Company's Full-Flow systems (in capitals).

CRITICAL CLEANING CRITICAL ETCHING PHOTORESIST STRIP
APPLICATIONS APPLICATIONS APPLICATIONS
------------ ------------ ------------

INITIAL WAFER CLEAN SILICON OXIDE ETCH AQUEOUS CHEMISTRY RESIST
PRE-DIFFUSION CLEAN POLYSILICON ETCH STRIP/POST-ASH CLEAN
PRE-OXIDATION CLEAN Silicon nitride (FRONT-END)
etch
PRE-THIN FILMS DEPOSITION Solvent chemistry resist
CLEAN strip/post-ash clean
Post-CMP clean (back end)
Solvent chemistry clean
(back end)

For classification purposes, the process to fabricate a semiconductor die
(without testing or packaging) is divided into two major phases referred to as
"front-end" and "back-end." Front-end steps are those that are performed to
fabricate individual components within an IC such as transistors. Back-end steps
are those that involve the creation of metal patterns on the wafers in order to
connect these individual components to create the IC. For a high-performance
logic IC, approximately 60% of the wet processing steps are front-end and the
balance are back-end.

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Critical Cleaning Applications. Critical cleans are those wet processing
steps that are performed in the front-end to remove surface contamination prior
to performing highly sensitive fabrication steps such as gate oxidation or
diffusion. The Company believes that approximately 40% of the wet processing
operations in the front-end fall into this category. To date, most of the
Company's Full-Flow systems have been purchased by semiconductor manufacturers
for use in these applications.

Critical Etching Applications. Wet processing is also commonly used in the
front-end to etch the surface of the wafer to remove silicon dioxide or other
surface material. It is generally important to tightly control the exact amount
of material removed and the uniformity of the etch. The Company believes that
approximately 20% of the wet processing steps in the front-end involve etching.
These etching steps are often performed as part of a wet clean rather than as
stand-alone operations, and as such, most of the Full-Flow systems sold by the
Company to date are also performing critical etching applications.

Photoresist Strip Applications. Photoresist stripping operations involve
the removal of either virgin or ashed photoresist from the surface of wafers
after a patterning step has been completed. Resist stripping is performed in
both the front-end and the back-end, and the Company believes that this process
represents approximately 40% of the wet processing operations in each area.
Front-end cleans and resist strips are generally performed with aqueous
chemistries. However, back-end cleans and resist strips must be accomplished
with different chemistries that utilize solvents, since front-end water-based
chemistries are incompatible with the metal present on wafers in the back-end.

In both cases, resist stripping operations are driven as much by cost as by
process performance. Production shipments of the Company's enhanced throughput
Full-Flow system, the Full-Flow 8100, capable of processing up to 100 8-inch
wafers per vessel, began in April 1996. For a nominally higher system sales
price, this system provides all the advantages of Full-Flow technology with
double the throughput of its predecessor. Since the Full-Flow system already
utilizes the chemistries required for front-end stripping, the Company believes
that the throughput and other COO advantages provided by this enhanced system
make it attractive for use in front-end resist strip applications. In 1996 and
1997, the Company delivered such systems for use in front-end applications
including resist stripping. In October 1997, the Company announced the Full-Flow
8150, capable of processing 150 eight inch wafers in a single enclosed vessel. A
dual vessel version is expected to be available in the near future. These
systems have the same footprint, and water and chemical comsumption as a
Full-Flow 8100, offering customers a significant increase in productivity with
little or no increase in operating costs.

Future Applications. Approximately 40% of semiconductor wet processing
operations are performed in the back-end and are comprised primarily of
solvent-based cleans and solvent-based resist strips. The Company believes that
its Full-Flow systems offer a range of attractive

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benefits for these applications as process requirements become more demanding
and regulatory restrictions on the release of chemical fumes become more
stringent. Furthermore, the Company believes that its proprietary
Direct-Displacement drying method is well suited for drying wafers with complex
topographies that often exist in the back-end.

FPD Manufacturing Applications. The Company believes that its Full-Flow
platform is particularly well-suited for cleaning and etching applications in
the manufacture of FPDs due to its advanced process capabilities, its
significantly lower use of water and chemicals relative to competing wet bench
systems and its substantially smaller footprint.

To address the rapidly increasing demand for FPDs, the Company developed a
high-throughput FPD processing system based on it Full-Flow platform. This
Full-Flow FPD system, which was first shipped in April 1996, has been designed
to process up to 50 FPD substrates per vessel. The system is available in a dual
vessel configuration capable of processing up to 100 substrates simultaneously.
In fiscal 1996, four dual-vessel systems were delivered to an FPD manufacturer
in Korea. An order from this customer for six additional systems in an increased
substrate size were delivered during fiscal 1997. List prices for the Company's
Full-Flow FPD products range from $1.5 million to $4.1 million depending on
system configuration.

CUSTOMERS

The Company sells its systems to leading semiconductor manufacturers
located in the United States, Europe and East Asia. Sales to LG, Siemens, Anam
Semiconductor Company, IBM and ProMOS Technology accounted for approximately
21.3%, 11.3%, 8.9%, 7.9% and 7.5%, respectively, of net sales in fiscal 1997.

The Company expects a significant portion of its future sales to remain
concentrated within a limited number of customers. The Company's results of
operations could be materially adversely affected by any loss of business from,
the cancellation of orders by, or decreases in prices of systems sold to, any of
its major customers. The Company's arrangements with its customers are generally
on a purchase order basis and not pursuant to long term contracts. A reduction
or delay in orders from any of the Company's significant customers, including
reductions or delays due to market, economic or competitive conditions in the
semiconductor or FPD industries, or the loss of any such customers, could have a
material adverse effect upon the Company's results of operations. While the
Company actively pursues new customers, there can be no assurance that the
Company will be successful in its efforts, and any significant weakening in
customer demand would have a material adverse effect on the Company. See Note 14
to the Consolidated Financial Statements.

13
<PAGE>

SALES AND MARKETING

The Company sells its systems through a combination of a direct sales
force, manufacturers' sales representatives, and East Asian sales
representatives. The Company's field service personnel support its sales force.
In North America, the Company utilizes a combination of a direct sales force and
manufacturers' sales representatives. In addition to the direct sales force at
the Company's headquarters in West Chester, Pennsylvania, the Company has direct
sales personnel located in Marietta, Georgia, Austin, Texas, San Jose,
California and Phoenix, Arizona. The Company employs a direct salesperson in
Paris, France and also supports the European market through its North American
direct sales force. The Company covers the Asian market with a director of sales
and marketing for Asian semiconductor sales and a direct salesperson based in
Singapore. The Company signed agreements with ANAM S & T Co. Ltd.("ANAM") in
1991, which markets in Korea, Innotech Corporation ("Innotech") in 1992, the
Company's agent in Japan, Ampoc Far East Company Limited ("AMPOC") in 1996, a
sales agent in Taiwan, Silicon Inernational Ltd ("Silicon International") in
1997, a sales agent in the Peoples Republic of China, and Aneric Enterprise Pte
Ltd. ("Aneric") in 1997, a sales agent in southeast Asia. The Company also
employs a direct salesperson to manage worldwide FPD equipment sales. See Item
13 - "Certain Relationships and Related Transactions."

Although the Company believes that it has good relationships with its
manufacturers' sales representatives, sales agents and distributors, there can
be no assurance that these relationships will continue. In the event of a
termination of any of the Company's existing representation, agency or
distribution arrangements, the Company's strategy of worldwide expansion could
be adversely affected.

CUSTOMER SATISFACTION

The Company believes that high quality customer support, customer training
and process consultation are key elements in the creation of customer
satisfaction. The Company also believes that product reliability, as it is
perceived by the individual customer technician, manager and executive, is
strongly correlated with customer satisfaction and the resulting decisions to
select the Company's technology and its products for broad application within
that individual customer's area of personal authority. The Company has made
substantial investments in its customer support, customer training, customer
communication and reliability engineering and testing programs and intends to
continue to make such investments in the future.

The Company's customer satisfaction organization is headquartered in West
Chester, Pennsylvania, with additional employees and consultants located in
Arizona, California, Colorado, New York, New Mexico, Oregon, Texas, Vermont,
France, Taiwan and the United Kingdom. The Company uses local support personnel
where there are multiple installed systems. Innotech, ANAM and AMPOC provide
service to customers located in Japan, Korea and Taiwan, respectively. The
Company's support personnel generally have prior technical backgrounds in the
mechanical, electronic or chemical processing industries and prior experience or
training in semiconductor manufacturing processes. These field personnel are
supported by the Company's manufacturing and engineering personnel during system
installation and initial process validation. Field support personnel also
perform warranty and after-warranty service and sales support.

The Company's products are typically sold with a 12 month warranty covering
all parts and labor, which commences upon completion of installation and final
acceptance.

BACKLOG

The Company manages its production forecast using both backlog and

<PAGE>

projected system orders. The Company includes in backlog only customer purchase
orders which have been accepted by the Company and for which shipment dates
have been assigned within the following 12 months. Orders are generally subject
to delay without penalty, but may contain cancellation penalties. As of October
31, 1997 the Company's backlog was approximately $21.8 million. The backlog is
for both semiconductor and FPD equipment and comprises approximately 65% of
international orders. As of October 31, 1996 the Company's backlog was
approximately $18.5 million. It has been the experience of the Company that
neither the backlog nor the pattern of receipt of orders is necessarily
indicative of future orders or revenues.

RESEARCH, DEVELOPMENT AND ENGINEERING

CFM maintains an applications and component testing laboratory in West
Chester, Pennsylvania to test new equipment and processes, design new features
and train customer and Company personnel. By basing new applications on its
proprietary Full-Flow platform, the Company can reduce substantially the time
and cost required to develop new process applications by focusing primarily on
the optimization of the applications' process recipes. The Company is currently
focusing its research, development and engineering efforts on equipment to
support additional wet process applications, to extend the productivity of the
current platform, to improve system reliability and to extend the Full-Flow
platform to larger substrate sizes. The Full-Flow 8100HT, which began shipping
early in 1997, has increased the productivity of the base Full-Flow 8100. The
Company recently introduced the 8150, which increases system throughput by an
additional 50%. The Company's 300mm Full-Flow system is presently under
development and is based on the 8100 platform. See "--Forward Looking
Statements--Dependence Upon Product Development."

The markets in which the Company and its customers compete are
characterized by rapidly changing technology, evolving industry standards and
continuous improvements in products and services. Because of continual changes
in these markets, the Company believes that its future success will depend, in
part, upon its ability to continue to improve its systems and its process
technologies and to develop new system applications which compete effectively on
the basis of COO,

15
<PAGE>

including yield, throughput, capital and direct costs and system performance. In
addition, the Company must adapt its systems and processes to technological
changes to support the standards required by emerging target markets. The
success of new system introductions is dependent on a number of factors,
including timely completion of new system designs, ultimate system performance
achieved by those designs and market acceptance. There can be no assurance that
the Company will be able to improve its existing systems and process
technologies or develop new system applications.

The Company's research, development and engineering expenses for the 1995,
1996 and 1997 fiscal years were $1.7 million, $4.4 million and $9.3 million,
respectively, representing 7.3%, 10.0% and 12.3% of net sales, respectively.
Research, development and engineering expenses were net of reimbursements of
$232,000, $1,592,000 and $890,000, respectively, for the 1995, 1996 and 1997
fiscal years.

COMPETITION

The Company faces substantial competition in its market segments from both
established competitors and potential new entrants. The Company believes that
the primary competitive factors in the markets in which it competes are yield,
throughput, capital and direct costs, system performance, size of installed
base, breadth of product line and customer satisfaction. The Company believes
that it competes favorably with respect to each of these factors. The Company
also faces the challenge posed by semiconductor and FPD manufacturers'
commitment to competing technologies. Most of the Company's competitors have
been in business longer than the Company, offer traditional wet processing
technology, and have broader product lines, more experience with high volume
manufacturing, broader name recognition, substantially larger installed bases
and significantly greater financial, technical and marketing resources than the
Company. In the semiconductor wet processing market, the Company competes
primarily with Dainippon Screen, FSI International, SCP Global Technologies,
Steag MicroTech, Sugai Corporation, SubMicron Systems, Tokyo Electron Limited
and Verteq. In the FPD wet processing market, the Company competes primarily
with Dainippon Screen, Shimada and Shibaura. There can be no assurance that
these competitors will not also develop enhancements to or future generations of
competitive products that will offer price or performance features that are
superior to the Company's systems or that the Company will gain market
acceptance.

The Company believes that in order to remain competitive, it must invest
significant financial resources in developing new product features and
enhancements and in maintaining customer satisfaction worldwide. In marketing
its products, the Company will face competition from suppliers employing new
technologies in order to extend the capabilities of competitive products beyond
their current limits or increase their productivity. Once a manufacturer has
selected a particular vendor's capital equipment, the Company believes that the
manufacturer generally relies upon that equipment for a specific production line
application and frequently will attempt to consolidate related capital equipment
requirements with the same vendor, to the

16
<PAGE>

degree that such consolidation is possible. In addition, increased competitive
pressure could lead to intensified price-based competition, resulting in lower
prices and margins, which would materially adversely affect the Company's
business and results of operations.

MANUFACTURING

The Company's manufacturing operations are based in West Chester,
Pennsylvania and consist of procurement, assembly and test engineering. During
fiscal 1996, the Company completed an expansion of its manufacturing operations,
which resulted in a 150% increase in production capacity. An additional
expansion took place in fiscal 1997 in a separate building within the same
industrial park in West Chester and resulted in a further 50% increase in
production capacity. The Company's Full-Flow systems are based upon a common set
of modules, enabling the Company to reduce manufacturing costs by using a large
number of common subassemblies and components. Many of the major subassemblies
are purchased complete from outside sources. The Company focuses its
manufacturing efforts on carefully documented assembly and integration
activities which the Company has determined to be critical to the successful
operation of its products. In 1994, as a result of adoption of SEMATECH
measurement and improvement methodologies, the Company began a concerted effort
to meet the requirements of ISO 9001, the international standard for quality
systems. In February 1997, the Company received ISO 9001 certification.

Certain of the Company's components and subassemblies are obtained from
sole suppliers or limited groups of suppliers, which are often small,
independent companies. Moreover, the Company believes that certain of these
components and subassemblies can only be obtained from its current suppliers.
The Company generally acquires such components on a purchase order basis and has
supply contracts of up to one year in duration. The Company's reliance on
outside vendors generally, and on sole suppliers in particular, involves several
risks, including a potential inability to obtain an adequate supply of required
components and reduced control over pricing, timely delivery and quality of
components. The Company has experienced and continues to experience some
reliability and quality problems with certain key components and subassemblies
provided by single source suppliers. Because the manufacture of certain of these
components and subassemblies is a complex process and can require long lead
times, there can be no assurance that delays or shortages caused by suppliers
will not occur. Historically the Company has not experienced any significant
delays in manufacturing due to an inability to obtain components, and the
Company is not currently aware of any specific problems regarding the
availability of components which might significantly delay the manufacturing of
its systems in the future. However, any inability to obtain adequate deliveries
or any other circumstance that would require the Company to seek alternative
sources of supply or, if possible, to manufacture such components internally
could delay the Company's ability to ship its systems and could have a material
adverse effect on the Company. See "-Forward Looking Statements - Sole or
Limited Sources of Supply."

17
<PAGE>

The Company is subject to a variety of federal, state and local laws, rules
and regulations relating to the use, storage, discharge and disposal of
hazardous chemicals used in its research, development and engineering
activities. The Company believes that it is currently in compliance in all
material respects with such laws, rules and regulations. However, failure to so
comply could result in substantial liability to the Company, suspension or
cessation of the Company's operations, restrictions on the Company's ability to
expand at its present location or requirements for the acquisition of additional
equipment or other significant expense. To date, the cost of compliance with
environmental rules and regulations has not had a material effect on the
Company's operations.

INTELLECTUAL PROPERTY

The Company relies on a combination of patent, copyright, trademark and
trade secret laws, non-disclosure agreements and other forms of intellectual
property protection to protect its proprietary technology. The Company currently
holds twelve patents in the United States, six patents in Japan, one patent in
Korea and fourteen patents in various European countries. The Company also has
multiple patent applications pending in the United States and various foreign
jurisdictions. The technology covered in the existing patents includes the
Company's Full-Flow process and Direct-Displace drying technologies upon which
the Company's current product offerings are based. While the Company recognizes
that these patents have significant value, the Company also believes that the
innovative skills, technical expertise and know-how of its personnel in applying
the art reflected in these patents would be difficult, costly and time consuming
to reproduce.

The Company has brought suit to enforce its patent rights against Steag
MicroTech, Inc. ("Steag") in an action commenced in July 1995 in the United
States District Court for the District of Delaware. Similarly, the Company took
action against Yieldup International Corporation ("YieldUp") in September 1995.
The Company's complaints in these actions allege infringement, inducement of
infringement and contributory infringement of one of the Company's patents. The
Company seeks damages and permanent injunctions to prevent further infringement.
The defendants have denied infringement and have asserted, among other things,
that the subject patent is invalid and unenforceable. There can be no assurance
that when these litigations are final any of the claims of the patent in issue
will be found to encompass use of the competitors' products or that the subject
patent will not be found to be unenforceable or invalid. A finding of invalidity
or unenforceability could result in the Company's competitors being able to
develop products using the Company's proprietary technology, which in turn could
have a material adverse effect on the Company. Further there can be no assurance
that any rights granted under any of the Company's patents will provide adequate
protection to the Company, or that the Company will have sufficient resources to
continue to prosecute its rights in the current actions or others.

18
<PAGE>

The suit against Steag was tried to a jury in December 1997. The jury found
that Steag did willfully infringe the Company's patent and that the Company's
patent is not invalid, and it awarded damages in excess of $3 million.
Post-trial motions are pending and final judgment in this case is not
anticipated before April 1998.

In the YieldUp action, the district court entered an order on October 14,
1997 granting summary judgment in favor of YieldUp on the defense of
noninfringement and dismissing YieldUp's counterclaim for declaratory judgment
as moot. The Company has filed a motion for reargument and that motion is still
pending.

In March 1997, Dainippon Screen Mfg. Co. Ltd. and DNS Electronics LLC
(collectively "DNS") filed an action against the Company in the United States
District Court for the Northern District of California. In this action, DNS
requested the court to declare that DNS does not infringe one of the Company's
patents and that the patent is invalid and unenforceable, and asserted claims
for monetary damages and injunctive relief for alleged violations of the Lanham
Act, unfair competition, tortious interference with prospective economic
advantage and unfair advertising. This action was dismissed on the grounds of
lack of personal jurisdiction and lack of indispensable party. DNS has appealed
this ruling. This ruling, even if affirmed, will not prevent DNS from pursuing
its claims in a court in which jurisdiction is proper.

Although there are no pending lawsuits against the Company regarding
infringement of any existing patents or other intellectual property rights or
any claims that the Company is infringing intellectual property rights of
others, there can be no assurance that such infringement claims will not be
asserted by third parties in the future. Also, there can be no assurance in the
event of such claims of infringement that the Company will be able to obtain
licenses on reasonable terms.

The Company's involvement in any patent dispute or other intellectual
property dispute or action to protect trade secrets and know-how could result in
a material adverse effect on the Company's business. Adverse determinations in
the current litigation or any other litigation in which the Company may become
involved could subject the Company to significant liabilities to third parties,
require the Company to grant licenses to or seek licenses from third parties,
and prevent the Company from manufacturing and selling its products. Any of
these situations could have a material adverse effect on the Company.

EMPLOYEES

As of October 31, 1997, the Company had 406 employees, of which 372 were
full-time and the balance temporary employees. There were 165 employees in
manufacturing operations, 95 in research, development and engineering, 25 in
sales and marketing, 80 in customer satisfaction and

19
<PAGE>

field support and 41 in general administrative and finance positions. Of the 372
total full-time employees, 8 were located in Asia and 15 were located in Europe.
The Company plans to hire additional personnel during the next 12 months.

While the Company has generally been able to find qualified candidates to
fill new positions, substantial growth throughout the semiconductor capital
equipment industry has made it more difficult to recruit qualified candidates
for certain positions in design, field support, testing and process engineering.
Once recruited, the Company then faces the task of training and integrating new
employees quickly enough to keep pace with its rapid growth. There can be no
assurance that the Company will be successful in retaining or recruiting,
training and integrating the necessary key personnel to support its anticipated
growth, and any failure to expand these areas in an efficient manner could have
a material effect on the Company's results of operations.

None of the Company's employees is represented by a labor union and the
Company has never experienced a work stoppage, slowdown or strike. The Company
considers its relationships with its employees to be good.

FORWARD LOOKING STATEMENTS

Statements in this Annual Report on Form 10-K, including those concerning
the Company's expectations of future sales, gross profits, research, development
and engineering expenses, selling, general and administrative expenses, product
introductions and cash requirements, include certain forward-looking statements.
As such, actual results may vary materially from such expectations. Factors
which could cause actual results to differ from expectations include variations
in the level of orders which can be affected by general economic conditions and
growth rates in the semiconductor and FPD manufacturing industries and in the
markets served by the Company's customers, the international economic and
political climates, difficulties or delays in product functionality or
performance, the delivery performance of sole source vendors, the timing of
future product releases, failure to respond adequately to either changes in
technology or customer preferences, changes in pricing by the Company or its
competitors, ability to manage growth, risk of nonpayment of accounts
receivable, changes in budgeted costs or failure to realize a successful outcome
to pending patent litigation, all of which constitute significant risks. For a
description of additional risks, see below. There can be no assurance that the
Company's results of operations will not be adversely affected by one or more of
these factors.

Fluctuations in Operating Results.

The Company has derived substantially all of its net sales from the sale of
a limited number of wet processing systems which typically have list prices,
before automation options and custom configurations, ranging from $1.2 million
to $2.7 million per system. Systems with automation options and custom
configurations can be priced in excess of $4.1 million per system. At the
Company's current revenue level, each sale or failure to make a sale can have a
material effect on the Company. A cancellation, rescheduling or delay in a
shipment near the end of a particular quarter may cause net sales in that
quarter to fall significantly below the Company's expectations and thus may
materially adversely affect the Company's operating results for such quarter.
Other factors which may lead to fluctuations in the Company's quarterly and

20
<PAGE>

annual operating results include: market acceptance of the Company's systems and
its customers' products; the number of systems being manufactured during any
particular period; the geographic mix of sales; the mix of sales by distribution
channel; the timing of announcement and introduction of new systems by the
Company and its competitors; a downturn in the market for personal computers or
other products incorporating semiconductors and FPDs; variations in the types of
systems sold; product discounts and changes in pricing; delays in deliveries
from suppliers; delays in orders due to customers' financial difficulties; and
volatility in the semiconductor and FPD industries and the markets served by the
Company's customers. Also, customers may face competing capital budget
considerations, thus making the timing of customer orders uneven and difficult
to predict. Many of the factors listed above are beyond the control of the
Company. In addition, continued investments in research, development and
engineering and the development of a worldwide sales, marketing and customer
satisfaction organization will result in significantly higher fixed costs. There
can be no assurance that the Company will be able to achieve a rate of growth or
level of sales in any future period commensurate with its level of expenses. The
impact of these and other factors on the Company's operating results in any
future period cannot be forecast with any degree of certainty. Due to the
foregoing factors, it is likely that in some future quarter or quarters the
Company's operating results may be below the expectations of analysts and
investors. In such event, the price of the Company's Common Stock would likely
be materially adversely affected. See Item 7 and "-Business-Industry
Background."

Acceptance by Customers of New Technology.

The Company's products all rely upon proprietary technology to accomplish
wet chemical processing during semiconductor or FPD manufacturing, which
technology is significantly different from the technological approaches in
current usage for these processes. Most of the Company's competitors make use of
established technology with competitive product variations. The semiconductor
industry is especially resistant to the introduction of changes in process or
approach in a manufacturing cycle which is quite long (up to twelve weeks),
consists of many separate process events (up to 300 or more) and suffers from
limited control measurement points during the overall fabrication process.
Accordingly, managers of semiconductor fabs have exhibited a strong resistance
to changing equipment and have been reluctant to embrace new technology,
including the Company's Full-Flow systems. Because a substantial investment is
required by semiconductor manufacturers to install and integrate capital
equipment into a semiconductor production line, these manufacturers will tend to
choose semiconductor equipment suppliers based on past relationships, product
compatibility and proven operating performance. Once a manufacturer has selected
a particular vendor's capital equipment, the Company believes that the
manufacturer generally relies upon that equipment for a specific production line
application and frequently will attempt to consolidate related capital equipment
purchases with the same vendor, to the degree that such consolidation is
possible. Many semiconductor and FPD manufacturers continue to extract marginal
improvements from existing wet processing technology in order to address issues
such as increases in feature density, reductions in line width and planned
increases in wafer size. There can be no assurance that the Company's products
will achieve broad market acceptance. See "-Business-Industry Background" and
"-Business-Products."

21
<PAGE>

Customer Concentration.

Historically, relatively few customers have accounted for a substantial
portion of the Company's net sales. Sales to LG and Siemens accounted for
approximately 21.3% and 11.3%, respectively, of net sales in fiscal 1997. The
Company expects a significant portion of its future sales to remain concentrated
within a limited number of customers. The Company's arrangements with its
customers are generally on a purchase order basis and not pursuant to long-term
contracts. There can be no assurance that the Company will be able to retain its
major customers or that such customers will not cancel or reschedule orders or
that canceled orders will be replaced by other sales. A reduction or delay in
orders from any of the Company's significant customers, including reductions or
delays due to market, economic or competitive conditions in the semiconductor or
FPD industries, or the loss of any such customers, could have a material adverse
effect upon the Company's results of operations. See "-Business-Customers."

Sole or Limited Sources of Supply.

The Company relies to a substantial extent on outside vendors to
manufacture and supply many of the components and subassemblies used in the
Company's systems. Certain of these components and subassemblies are obtained
from a sole supplier or a limited group of suppliers, many of which are small,
independent companies. Moreover, the Company believes that certain of these
components and subassemblies can only be obtained from its current suppliers.
The Company's reliance on outside vendors generally and a sole or a limited
group of suppliers in particular, involves several risks, including a potential
inability to obtain an adequate supply of required components and reduced
control over pricing, timely delivery and quality of components. The Company has
experienced and continues to experience some reliability and quality problems
with certain key components and subassemblies provided by single source
suppliers. Because the manufacture of certain of these components and
subassemblies is a complex process and requires long lead times, there can be no
assurance that delays or shortages caused by suppliers will not occur. The
process of obtaining and qualifying replacement suppliers could be lengthy, and
no assurance can be given that any additional sources would be available to the
Company on a timely basis. Any inability to obtain adequate deliveries of
components and subassemblies which conform to the Company's reliability and
quality requirements or any other circumstance that would require the Company to

22
<PAGE>

seek alternate sources of supply or, if possible, to manufacture such components
internally could delay the Company's ability to ship its systems and could have
a material adverse effect on the Company. See "-Business-Manufacturing."

Dependence on Limited Product Offerings.

To date, the Company's net sales have consisted primarily of sales to the
semiconductor industry, although the Company has developed and is now selling a
version of its Full-Flow system for use in FPD manufacturing. The ability of the
Company to diversify its operations through the introduction and sale of system
enhancements with new applications is dependent upon the success of the
Company's continuing research, development and engineering activities, as well
as its marketing efforts. The Company's continued sales growth will depend upon
achieving market acceptance of its Full-Flow systems and future products. There
can be no assurance that the Company will be able to develop, introduce or
market new systems or system enhancements in a timely or cost-effective manner
or that any such systems or enhancements will achieve market acceptance. See
"-Business-Products."

Dependence upon Product Development.

The markets in which the Company and its customers compete are
characterized by rapidly changing technology, evolving industry standards and
continuous improvements in products and services. In order to remain competitive
in the future, the Company will need to develop and commercialize additional
cleaning and etching processes based on its Full-Flow platform. Further, the
Company will need to develop new products which are capable of supporting
customers' increasingly complex process requirements and which compete
effectively on the basis of overall COO, including process performance and
capital productivity. The market for FPD manufacturing equipment presents an
additional challenge as the technology is at an earlier stage and subject to
more rapid evolution. The success of new system introductions is dependent on a
number of factors, including timely completion of new system designs, system
performance and market acceptance, and may be adversely affected by
manufacturing inefficiencies associated with the start up of such new
introductions and the challenge of producing systems in volume which meet
customer requirements. Because it is generally not possible to predict the time
required and costs involved in reaching certain research, development and
engineering objectives, actual development costs could exceed budgeted amounts
and estimated product development schedules may require extension. Any delays or
additional development costs could have a material adverse effect on the
Company's business and results of operations. There can be no assurance that the
Company will successfully develop and introduce new products or enhancements to
its existing products on a timely basis or in a manner which satisfies potential
customers or achieves widespread market acceptance.

23
<PAGE>

Because of the large number of components in, and the complexity of, the
Company's systems, significant delays can occur between the introduction of
systems or system enhancements and the commencement of commercial shipments. The
Company has from time to time experienced delays in the introduction of, and
certain technical and manufacturing difficulties with, certain of its systems
and enhancements, and may experience such delays and technical and manufacturing
difficulties in future introductions or volume production of new systems or
enhancements. The Company's inability to overcome such difficulties, to meet the
technical specifications of any new systems or enhancements, or to manufacture
and ship these systems or enhancements in volume and in a timely manner, would
materially adversely affect the Company's business and results of operations, as
well as its customer relationships. In addition, the Company from time to time
incurs unanticipated costs to ensure the functionality and reliability of its
products early in their life cycles, which costs can be substantial. If new
products or enhancements experience reliability or quality problems, the Company
could encounter a number of difficulties, including reduced orders, higher
manufacturing costs, delays in collection of accounts receivable and additional
service and warranty expenses, all of which could materially adversely affect
the Company's business and results of operations. See "-Business-Products and
- -Business-Research, Development and Engineering."

Management of Growth.

The Company is currently undergoing a period of rapid growth. To
accommodate this growth, the Company faces the task of identifying, recruiting,
training and integrating new employees quickly enough to keep pace with its
rapid growth. Many of the positions which are critical to supporting the
Company's growth require experience with semiconductor and FPD capital
equipment. The continuing growth of the semiconductor and FPD capital equipment
industries has made the recruitment of such experienced personnel difficult. The
Company's growth may also strain the Company's management, manufacturing,
financial and other resources. Any failure to expand these areas in an efficient
manner could have a material adverse effect on the Company. The Company has
recently leased additional facilities and may be required to secure other
additional facilities in the future. The need to acquire additional remote
facilities could be disruptive and could have a material adverse effect on the
Company. See "-Business-Employees" and Item 2-"Properties."

Dependence upon Personnel.

The success of the Company depends to a large extent upon the efforts of
key managerial and technical employees. The loss of services of any of these
persons could have a material adverse effect on the Company. The Company has not
entered into written employment agreements with any of its executive officers
other than its chief financial officer, nor does the Company maintain key man
life insurance on any of its personnel.

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<PAGE>

In addition, the success of the Company will also depend upon its ability
to attract and retain qualified employees, particularly highly skilled design
and process engineers involved in the manufacture of existing systems, the
development of new applications and systems and the installation, training and
maintenance related to those systems already installed at customer sites. There
can be no assurance that the Company will be successful in retaining or
recruiting, training and integrating the necessary personnel to support its
anticipated growth, which could have a material adverse effect on the Company's
results of operations. See "-Business-Employees," and "-Executive Officers of
the Registrant."

Lengthy Sales Cycle.

Sales of the Company's systems depend upon the decision of a prospective
customer to increase manufacturing capacity. These decisions typically involve
significant capital commitments or a change in process approach, which may
require the approval of senior management. The amount of time from the initial
contact with the customer to the first order is typically one to two years. The
Company's ability to obtain orders from potential customers has depended in the
past and may continue to depend in the future upon customers purchasing a new
system in order to evaluate Full-Flow and Direct-Displacement drying
technologies as an alternative to existing wet processing technologies. For many
potential customers, decisions to undertake such evaluations occur infrequently.
The Company often experiences delays in finalizing further system sales while
the customer evaluates and receives approvals for the purchase of additional
systems. Such delays may include the time necessary to plan, design or complete
a new or expanded fab. Due to these factors, the Company's systems typically
have a lengthy sales cycle during which the Company may expend substantial funds
and management effort. There can be no assurance that any of these expenditures
or efforts on the part of the Company will result in sales. See
"-Business-Products" and "-Business-Competition."

Volatility of the Semiconductor Industry.

The Company's business depends, in significant part, upon capital
expenditures by manufacturers of semiconductor devices, which in turn depend
upon the current and anticipated market demand for such devices and the products
utilizing such devices. The semiconductor industry has been highly volatile and
historically has experienced periods of oversupply, resulting in significantly
reduced demand for capital equipment, including wet processing systems.
Recently, a number of semiconductor manufacturers have experienced a reduction
in order growth and, in a few instances, a reduction in overall orders. These
events have caused certain semiconductor manufacturers to postpone or cancel
equipment deliveries to previously planned expansions or new fab construction
projects. In addition, certain market analysts project limited growth in
expenditures for semiconductor capital equipment in 1998. Historically, a
significant portion of the Company's sales have been to Asian companies. The
recent economic crisis in Asia could have a material adverse effect on the
Company's operating results. There can

25
<PAGE>

be no assurance that further order cancellations or reductions in order growth
or overall orders for semiconductors will not have a material adverse effect
upon the Company's business or results of operations. The Company believes that
the FPD market may be similarly volatile. The need for continued investment in
research, development and engineering, marketing and customer satisfaction
activities may limit the Company's ability to reduce expenses in response to
future downturns in the semiconductor or FPD industries. The Company's net sales
and results of operations could be materially adversely affected if downturns or
slowdowns in the semiconductor or FPD markets occur in the future.

International Sales.

Sales to customers located outside the United States accounted for
approximately 65% of the Company's net sales in fiscal 1997. The Company
anticipates that such international sales are subject to numerous risks,
including United States and international regulatory requirements and policy
changes, political and economic instability, increased installation costs,
difficulties in accounts receivable collection, exchange rates, tariffs and
other barriers, extended payment terms, difficulty in staffing and managing
international operations, dependence on and difficulties in managing
international distributors or representatives and potentially adverse tax
consequences. Furthermore, although the Company endeavors to meet technical
standards established by foreign regulatory bodies, there can be no assurance
that the Company will be able to comply with such standards in the future. In
addition, the laws of certain other countries may not protect the Company's
intellectual property to the same extent as the laws of the United States. As
part of its efforts to penetrate the East Asia market, the Company entered into
its first distributor agreement with ANAM in Korea in 1991, a distribution
agreement with Innotech in Japan in 1992, a sales agent agreement with AMPOC in
Taiwan in 1996, a sales representation agreement with Aneric in southeast Asia
in 1997 and a sales agency agreement with Silicon International in the Peoples
Republic of China in 1997. Although management believes that it maintains good
relationships with ANAM, Innotech, AMPOC, Silicon International and Aneric,
there can be no assurance that these relationships will continue. In the event
of a termination of any of the Company's existing representation, agency or
distribution arrangements, the Company's international sales could be adversely
affected. Although the Company's sales are predominantly denominated in United
States dollars, to the extent that the Company expands its international
operations or changes its pricing practices to denominate prices in
international currencies, the Company will be exposed to increased risks of
currency fluctuation. Historically, a significant portion of the Company's sales
have been to Asian companies. The recent economic crisis in Asia could have a
material adverse effect on the Company's operating results. Additionally, a
strengthening in the value of the United States dollar in relation to
international currencies may adversely affect the Company's future sales to
international customers. There can be no assurance that any of these factors
will not have a material adverse effect on the Company. See "Business-Sales and
Marketing" and Item 7 "-Overview."

26
<PAGE>

Highly Competitive Industry.

The Company faces substantial competition in its market segments from both
established competitors and potential new entrants. The Company believes that
the primary competitive factors in the markets in which the Company competes are
yield, throughput, capital and direct costs, system performance, size of
installed base, breadth of product line and customer satisfaction, as well as
customer commitment to competing technologies. Most of the Company's competitors
have been in business longer than the Company, offer traditional wet processing
technology, and have broader product lines, more experience with high volume
manufacturing, broader name recognition, substantially larger installed bases
and significantly greater financial, technical and marketing resources than the
Company. In the semiconductor wet processing market, the Company competes
primarily with Dainippon Screen, FSI International, Santa Clara Plastics, Steag
MicroTech, SubMicron Systems, Tokyo Electron Limited and Verteq. In the FPD wet
processing market, the Company competes primarily with Dainippon Screen, Shimada
and Shibaura. There can be no assurance that the Company will overcome the
established positions of these competitors or that the Company's competitors
will not develop enhancements to or future generations of competitive products
that will offer price and performance features that are superior to the
Company's systems. The Company believes that in order to remain competitive, it
must invest significant financial resources in developing new product features
and enhancements and in maintaining customer satisfaction worldwide. In
marketing its products, the Company will face competition from suppliers
employing new technologies in order to extend the capabilities of competitive
products beyond their current limits or increase their productivity. In
addition, increased competitive pressure could lead to intensified price-based
competition, resulting in lower prices and margins, which would materially
adversely affect the Company's business and results of operations. See
"-Business-Competition."

Intellectual Property Rights

The Company relies on a combination of patents, copyrights, trademarks and
trade secrets, non-disclosure agreements and other forms of intellectual
property protection to defend its proprietary technology. Although the Company
believes that its patents and trademarks may have value, the Company recognizes
that its future success will depend primarily on the innovation, technical
expertise and marketing abilities of its personnel. The Company currently holds
12 patents in the United States and 21 international patents and has patent
applications pending or under evaluation in the United States and various
foreign jurisdictions.

The Company is currently asserting its patent rights in litigation against
two defendants, alleging infringement, inducement of infringement and
contributory infringement of one of the Company's patents. The defendants have
denied infringement and have asserted, among other things, that the patent at
issue is invalid and unenforceable. One case was tried to a jury in December
1997. The jury

27
<PAGE>

found that the Company's patent was willfully infringed by the defendant and
that it was not invalid, and it awarded damages in excess of $3 million.
Post-trial motions are pending and final judgment is not anticipated before
April 1998. The defendant is expected to appeal any adverse judgment. In the
second action brought by the Company, summary judgment was granted by the court
in October 1997 holding that the defendant's process does not infringe the
Company's patent. The Company is seeking reargument in this case.

In addition to the two suits initiated by the Company, a third competitor
filed a suit against the Company in March 1997. In this action filed in the
United States District Court for the Northern District of California, the
competitor seeks a declaration that it does not infringe one of the Company's
patents and that the patent is invalid and unenforceable, and asserts claims for
monetary damages and injunctive relief for alleged violations of the Lanham Act,
unfair competition, tortious interference with prospective economic advantage.
This case was dismissed for lack of jurisdiction and an appeal by the competitor
is pending.

In all of these cases, there can be no assurance that any claim of the
subject patent will be finally adjudged to encompass use of the competitors'
product or that the subject patent will not be found to be unenforceable or
invalid during prosecution of the actions. A finding of invalidity or
unenforceability could result in the Company's competitors developing products
using the Company's propriety technology, which in turn could have a material
adverse effect on the Company. The Company believes that these actions, even if
completely successful, will be costly to the Company in terms of both financial
and management resources.

There can be no assurance that additional patents will be issued on the
Company's pending applications or that competitors legitimately will not be able
to ascertain proprietary information embedded in the Company's products which is
not covered by patent or copyright. In such case, the Company may be precluded
from preventing its competitors from making use of such information. There are
no pending lawsuits or claims against the Company regarding infringement of any
existing patents or other intellectual property rights of others. There can be
no assurance, however, that such infringement clams will not be asserted in the
future, nor can there be any assurance, if such clams are made, that the Company
will be able to defend such claims successfully or, if necessary, obtain
licenses on reasonable terms. Adverse determinations in any litigation naming
the Company could subject the Company to significant liabilities to third
parties, require the Company to seek licenses from third parties, and prevent
the Company from manufacturing and selling its systems. Any of these events
could have a material adverse effect on the Company.

Environmental Regulation.

The Company is subject to a variety of federal, state and local laws, rules
and regulations relating to the use, storage, discharge and disposal of
hazardous chemicals used during its research, development

28
<PAGE>

and engineering activities. The Company believes that it is currently in
compliance in all material respects with such laws, rules and regulations.
However, failure to so comply could result in substantial liability to the
Company, suspension or cessation of the Company's operations, restrictions on
the Company's ability to expand its operations or requirements for the
acquisition of additional equipment or other significant expense, any of which
could have a material adverse effect on the Company. See
"-Business-Manufacturing."

Volatility of Stock Price.

The Company believes that a variety of factors could cause the price of the
Company's Common Stock to fluctuate, perhaps substantially, including:
announcements of developments related to the Company's business; quarterly
fluctuations in the Company's actual or anticipated operating results and order
levels; general conditions in the semiconductor and FPD industries or the
worldwide economy; announcements of technological innovations; new products or
product enhancements by the Company or its competitors; developments in patents
or other intellectual property rights and litigation; and developments in the
Company's relationships with its customers, distributors and suppliers. In
addition, in recent years the stock market in general and the market for shares
of small capitalization and semiconductor industry-related stocks in particular
have experienced extreme price fluctuations which have often been unrelated to
the operating performance of affected companies. Any such fluctuations in the
future could adversely affect the market price of the Company's Common Stock.
There can be no assurance that the market price of the Common Stock of the
Company will not decline.

ITEM 2. PROPERTIES

The Company conducts its manufacturing in a 26,000 square foot facility
which it owns in West Chester, Pennsylvania and a 13,941 square foot facility
that it leases across the street from the main manufacturing facility. The lease
on the 13,941 square foot facility expires in June 1998. The Company also leases
an 11,000 square foot facility nearby the industrial park for storage purposes
and a 32,000 square foot prototype laboratory and storage facility in another
nearby industrial park. The storage facility lease expires in October 1998 and
the prototype facility lease expires in June 1999.

In January 1996 the Company commenced occupancy of a 38,400 square foot
leased office building located in the same industrial park as its manufacturing
facility to serve as the new location for its engineering, sales and marketing
and administration activities. The lease expires in November 2000.

In April 1997, the Company leased an 8,023 square foot facility in the same
industrial park as its manufacturing facility for its customer satisfaction
staff. The lease on this facility expires in December 1998.

29
<PAGE>

In fiscal 1997, the Company entered into a non-cancelable agreement to
lease a 60,000 square foot production facility and an 80,000 square foot office
facility to be built for the Company in Exton, Pennsylvania. The Company plans
to move all of its manufacturing, engineering, sales and marketing, customer
satisfaction and administrative functions to these two new facilities once they
are completed. Occupancy is expected to be in two phases in late 1998 and early
1999. The Company intends to maintain the building that it owns as a research
and development facility. See Note 16 of the Notes to Consolidated Financial
Statements.

The Company believes that suitable additional space, if ultimately needed,
will be available on terms acceptable to the Company.

ITEM 3. LEGAL PROCEEDINGS

The Company has asserted certain of its patent rights against two
defendants and is the defendant in another matter seeking a declaratory judgment
of patent noninfringement and invalidity, each matter pertaining to U.S. Letters
Patent No. 4,911,761. The United States District Court for the District of
Delaware granted a summary judgment in one matter wherein the Company is the
plaintiff and the Company has filed for reargument. On December 12, 1997 a jury,
following trial in the United States District Court for the District of
Delaware, found the subject patent valid and enforceable on all asserted claims
and found the defendant to have willfully infringed on all asserted claims.
Post-trial motions by both parties are being considered by the court at the date
of this filing. Some of the claims in the matter seeking declaratory judgment
have been dismissed for lack of jurisdiction, a finding which is under appeal.
Although management believes that the ultimate resolution of these matters will
not have a material adverse impact on the Company's financial position or
results of operations, there can be no assurance in that regard.

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

None.

30
<PAGE>

EXECUTIVE OFFICERS OF THE REGISTRANT

The following table sets forth certain information concerning the Company's
executive officers and key employees:

NAME AGE POSITION
---- --- --------

Christpher F. McConnell 44 Chairman of the Board of Directors
Roger A. Carolin 42 President, Chief Executive Officer and Director
Lorin J. Randall 54 Vice President-Finance, Chief Financial
Officer, Secretary and Treasurer
Joseph E. Berger 39 Vice President-Worldwide Sales and Marketing
David L. deLesdernier 48 Vice President-Engineering
Garry M. Mayers 44 Vice President-Customer Service
John L. Posta 56 Vice President-Manufacturing
Steven T. Bay 41 Chief Technical Officer
Heinrich S. Erhardt 53 Vice President-Product Development
Steven Verhaverbeke 32 Director of Process Technology
Alan E. Walter 43 Senior Vice President, Business
Development

- ----------

CHRISTOPHER F. MCCONNELL founded the Company in May 1984 and served as
President and Chief Executive Officer until October 1990 when he was named
Chairman of the Board of Directors. Prior to forming the Company, Mr. McConnell
held various technical and marketing positions with Dow Chemical. Mr. McConnell
received his BS and MS degrees in Chemical Engineering from Dartmouth College
and Purdue University, respectively, and his MBA from Harvard Business School.
Mr. McConnell is a named inventor on all of the Company's patents.

ROGER A. CAROLIN has served the Company as a director since its inception
in 1984 and as President and Chief Executive Officer since April 1991. From
October 1990 to April 1991, he served as a marketing and sales consultant to the
Company. From June 1984 to October 1990 Mr. Carolin was Senior Vice President of
The Mills Group, Inc., a real estate development firm. Previously, Mr. Carolin
was with The General Electric Company and Honeywell, Inc. in a variety of
technical positions. Mr. Carolin received his BS in Electrical Engineering from
Duke University and his MBA from Harvard Business School.

LORIN J. RANDALL joined the Company in January 1995 as Vice
President-Finance, Chief Financial Officer, Secretary and Treasurer. From May
1994 to June 1995, Mr. Randall served as the President and Chief Executive
Officer of Greenwich Pharmaceuticals Incorporated, a drug development company
where from September 1991 to May 1994, he served as Vice President-Finance and
Chief Financial Officer. Mr. Randall received his BS in Accounting from The
Pennsylvania State University and his MBA from Northeastern University. Mr.
Randall is a director of Quad Systems Corporation.

31
<PAGE>

JOSEPH E. BERGER joined the Company in June 1993 and has served as Vice
President-Worldwide Sales and Marketing from December 1995. Mr. Berger served as
the Company's Director of Sales and Marketing from June 1995 to December 1995,
and as Program Director from June 1993 to June 1995. Mr. Berger served as
Director of Sales for A.E. Staley Manufacturing Co., a manufacturer of corn
sweetners and starches, from 1990 until May 1993. Mr. Berger received his BS in
Chemical Engineering from the University of Virginia and MBA from Harvard
Business School.

DAVID L. DELESDERNIER joined the Company in September 1996 and currently
serves as Vice President-Engineering. From August 1995 until August 1996, Mr.
deLesdernier was Vice President-Technology for IPEC/Clean, a manufacturer of
sulfuric acid reprocessing systems for the semiconductor industry. From 1977 to
June 1995 Mr. deLesdernier was Corporate Vice President-Commercial and
International for Systems Applications International Corp., a defense
contractor. Mr. deLesdernier received his BS and MS from the Georgia Institute
of Technology and his MBA from San Diego State University.

GARRY M. MAYERS joined the Company in October 1996 and currently serves as
Vice President-Customer Service. From April 1991 until October 1996, Mr. Mayers
was Director of World Wide Customer Service at ADE Corporation, a manufacturer
of chemical vapor deposition and ion implant equipment for semiconductor
devices. Mr. Mayers attended Northeastern University, majoring in electrical
engineering.

JOHN L. POSTA joined the Company in October 1993 as Vice
President-Manufacturing. Mr. Posta served as a consulting engineer to the
Company from August 1993 to October 1993 and as a manufacturing consultant from
August 1989 to October 1993. Mr. Posta received his BS in Industrial Management
from Fairleigh Dickinson University.

STEVEN T. BAY joined the Company in April 1992 as Director of Technology
and Marketing/Far East, and has served as Chief Technical Officer since
September 1994. From 1990 until April 1992, Mr. Bay was employed by Bridgetek,
Inc. of San Jose, California, which was the manufacturer's representative for
the Company in California and the Pacific Northwest. Mr. Bay received his BA in
Chemistry from St. Louis University.

HEINRICH S. ERHARDT joined the Company in January 1992 and is currently
Vice President-Product Development. From January 1992 to September 1996 he
served as Vice President-Engineering. Prior to joining the Company, Mr. Erhardt
served as Vice President of Operations for Image Storage/Retrieval Systems, a
supplier of high-density data storage systems, from January to December 1991.
Mr. Erhardt received his BS in Mechanical Engineering from City University of
New York and his MS in Engineering Science from The Pennsylvania State
University.

32
<PAGE>

STEVEN VERHAVERBEKE joined the Company in February 1995 and has served as
Director of Process Technology since that time. Dr. Verhaverbeke was employed by
IMEC of Leuven, Belgium, a microelectronics research institute, as a senior
researcher from August 1994 to January 1995 and as a doctoral researcher from
September 1988 to July 1993. Dr. Verhaverbeke also served as a researcher at
Tohoku University in Sendai, Japan from August 1993 to August 1994. Dr.
Verhaverbeke received his Ph.D. in Chemical Engineering from K. U. Leuven,
Belgium.

ALAN E. WALTER co-founded the Company in 1984 and currently serves as
Senior Vice President-Business Development, with primary responsibility for the
Company's marketing efforts in the FPD industry. Prior to joining the Company,
he was with the Cochrane Division of Crane Company, a producer of ultra-high
purity water systems. Mr. Walter received his BS in Chemical Engineering from
the University of Delaware. He is a named inventor on ten of the Company's
patents.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.

The Company's Common Stock is traded in The Nasdaq Stock Market under the
symbol CFMT. The range of high and low closing prices for the Common Stock as
reported by the National Association of Securities Dealers, Inc. for the periods
indicated below is as follows:

Fiscal 1997 HIGH LOW
- ----------- ---- ---

1st Quarter.................................... $37.75 $ 8.25
2nd Quarter ................................... 41.75 25.00
3rd Quarter ................................... 37.75 25.25
4th Quarter ................................... 40.88 14.00

Fiscal 1996
- -----------

3rd Quarter(1)................................. $11.00 $8.25
4th Quarter ................................... 13.50 7.75

- ----------

(1) Commencing June 21, 1996, the day on which trading commenced following the
effectiveness of the Company's initial public offering.

These prices reflect inter-dealer quotations, without retail mark-ups,
mark-downs or other fees or commissions, and may not necessarily represent
actual transactions.

As of January 20, 1998, the closing quotation for the Common Stock was
$17.4375. As of January 20, 1998, there were approximately 160 holders of record
and the Company believes that there were approximately 4000 beneficial owners of
the Company's Common Stock.

33
<PAGE>

The Company has never declared or paid a cash dividend on its Common Stock
and does not anticipate paying any cash dividends in the foreseeable future. The
Company currently intends to retain its earnings, if any, for the development of
its business. The declaration of any future dividends by CFM is within the
discretion of its Board of Directors and will be dependent on the earnings,
financial condition and capital requirements of CFM as well as any other factors
deemed relevant by its Board of Directors.

ITEM 6. SELECTED FINANCIAL DATA.

The following table contains certain selected consolidated financial data
of the Company and is qualified by the more detailed Consolidated Financial
Statements and Notes thereto included elsewhere in this report. The consolidated
statement of income data for the fiscal years ended October 31, 1995, 1996 and
1997 and the consolidated balance sheet data as of October 31, 1996 and 1997
have been derived from the Consolidated Financial Statements of the Company
which have been audited by Arthur Andersen LLP, independent public accountants,
as indicated in their report included elsewhere herein. The consolidated
statement of income data for the fiscal years ended October 31, 1993 and 1994
and the consolidated balance sheet data as of October 31, 1994 and 1995 have
been derived from the Consolidated Financial Statements of the Company which
have been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their reports not included herein. The consolidated balance sheet
data as of October 31, 1993 has been derived from unaudited financial
statements. The unaudited financial statements include all adjustments,
consisting only of normal adjustments, that the Company considers necessary for
a fair presentation of the results of operations for such periods. This data
should be read in conjunction with the Consolidated Financial Statements and
Notes thereto and Item 7 - "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere herein.

34
<PAGE>

FISCAL YEAR ENDED OCTOBER 31,
---------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF INCOME DATA:
Net sales ................... $11,840 $15,937 $23,430 $44,013 $75,772
Cost of sales ............... 6,752 9,114 13,463 23,317 40,072
------- ------- ------- ------- -------
Gross profit ............. 5,088 6,823 9,967 20,696 35,700
------- ------- ------- ------- -------
Operating Expenses:
Research, development and
Engineering ............ 720 2,100 1,717 4,375 9,334
Selling, general and
administrative ......... 2,273 3,150 5,972 11,679 19,360
------- ------- ------- ------- -------
Total operating expenses 2,993 5,250 7,689 16,054 28,694
------- ------- ------- ------- -------
Operating income ............ 2,095 1,573 2,278 4,642 7,006
Interest (income) ........... (7) (31) (72) (271) (2,163)
Interest expense ............ 762 828 245 428 281
------- ------- ------- ------- -------
Income before income taxes .. 1,340 776 2,105 4,485 8,888
Income taxes................. 457 238 703 1,525 2,666
------- ------- ------- ------- -------
Net income................... $ 883 $ 538 $ 1,402 $ 2,960 $ 6,222
======= ======= ======= ======= =======

Net income per share(1) ..... $ 0.35 $ 0.61 $ 0.80
======= ======= =======
Weighted average common and
common equivalent shares (1) 3,994 4,832 7,764

35
<PAGE>

OCTOBER 31,
--------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(IN THOUSANDS)
BALANCE SHEET DATA:

Cash, cash equivalents and
short-term investments ... $ 112 $ 1,106 $ 408 $12,254 $ 46,181

Working capital ............ 3,118 7,177 8,136 27,525 81,796

Total assets ............... 9,332 16,689 18,454 44,251 109,496

Long-term debt, less current
portion .................. 5,610 7,820 3,005 2,525 2,571

Shareholders' equity ....... 237 5,109 9,775 32,711 89,868

- ----------

(1) See Note 2 of the Notes to Consolidated Financial Statements for an
explanation of the computation of net income per share.

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

OVERVIEW

CFM Technologies, Inc. designs, manufactures and markets advanced wet
processing equipment for sale to the worldwide semiconductor and flat panel
display ("FPD") manufacturing industries. The Company was founded in 1984 and
began commercial operations in 1990 following a period of technology and product
development, during which time the Company's patented Full-Flow enclosed
processing and Direct-Displace drying technologies were developed.

The Company has derived substantially all of its revenues from the sale of
a relatively small number of its systems, recent sales of which have ranged in
price from approximately $1.3 million to $2.7 million. As of October 31, 1997,
the Company has shipped over 120 systems to more than 30 semiconductor and FPD
manufacturers worldwide. The Company has been undergoing a period of rapid
growth with net sales during fiscal 1997 increasing by 72% over net sales for
fiscal 1996. Net sales of Full-Flow systems to companies in the FPD
manufacturing industry represented 24% and 20% of total net sales in fiscal 1997
and 1996, respectively. The Company believes that capital expenditures in the
FPD manufacturing industry are subject to significant variations and expects
that its FPD sales as a percentage of total sales will fluctuate as the Company
attempts to penetrate new accounts. Sales of FPD Full-Flow systems to LG
represented 88% of all FPD sales during fiscal 1997. The Company believes that
FPD Full-Flow system sales will represent a smaller portion of total sales
during fiscal 1998.

The Company sells its systems worldwide and records a significant portion
of its sales to customers outside the United States. In fiscal 1997,
international sales constituted 65% of net sales, including sales to customers
in Korea and Taiwan which represented 30% and 17% of total sales, respectively.
In the fall of 1997, the currencies and economies of certain Asian countries,
including Korea, came under pressure. Some of these Asian countries subsequently
experienced currency devaluation, received external financial support and agreed
to certain economic

36
<PAGE>

reorganization programs anticipated to reduce growth and credit demand. In
December 1997, the Company received notification of an order cancellation as a
result of these events. Adjusted for that cancellation, orders scheduled for
shipment to Korea and Taiwan in the Company's backlog as of October 31, 1997
represented 22% and 32% of the total backlog, respectively. The Company was
informed by a customer in Taiwan that the customer could not take delivery of an
order scheduled to be shipped in October 1997 because of a fire in the
customer's factory. This action caused a reduction of net sales for the fourth
quarter of fiscal 1997 from the level previously anticipated by the Company.
There can be no assurance that the recent economic events in Korea, Taiwan and
other Asian countries will not continue to affect the Company's net sales.
Cancellation of additional orders could have a material adverse effect on the
Company.

The Company has significantly increased its operations to support increased
revenues, including the hiring of additional personnel, and has made and expects
to continue to make substantial investments in research, engineering and
development to support product development as well as sales and marketing to
promote its products. In addition, the Company entered into several leases to
allow it to expand its manufacturing capacity. There can be no assurance that
the Company will be able to achieve a rate of growth or level of sales in any
future period commensurate with its recent growth and its level of expenses.
Future results will depend upon a variety of factors, including the timing of
significant orders, the ability of the Company to bring new systems to market,
the timing of new product releases by the Company's competitors, patterns of
capital spending by the Company's customers, the impact of economic controls in
countries where the Company does business, market acceptance of new or enhanced
versions of the Company's systems, changes in pricing by the Company or its
competitors and the volatility of the semiconductor and FPD industries and of
the markets served by the Company's customers.

The Company's gross margin has been and will continue to be affected by a
variety of factors including the mix and average selling prices of systems and
the mix of sales to domestic and international markets. The Company pays
significant commissions to agents on sales in East Asia. As a result, gross
margin and selling, general and administrative expenses as a percentage of net
sales have in the past and will continue in the future to fluctuate based to a
large extent on changes in proportion of net sales in East Asia.

37
<PAGE>

RESULTS OF OPERATIONS

The following table sets forth the components of the Company's statements
of income for the fiscal years ended October 31, 1997, 1996 and 1995, expressed
as a percentage of net sales:

FISCAL YEAR ENDED OCTOBER 31,
---------------------------------
1997 1996 1995
---- ---- ----
Net sales .............................. 100.0% 100.0% 100.0%
Cost of sales .......................... 52.9 53.0 57.5
----- ----- -----
Gross profit ................... 47.1 47.0 42.5
----- ----- -----
Operating expenses:
Research, development and
engineering ..................... 12.3 10.0 7.3
Selling, general and
administrative .................. 25.6 26.5 25.5
----- ----- -----
Total operating expenses ...... 37.9 36.5 32.8
----- ----- -----
Operating income ....................... 9.2 10.5 9.7
Interest (income) expense, net ......... (2.5) 0.3 0.7
----- ----- -----
Income before income taxes ............. 11.7 10.2 9.0
Income taxes ........................... 3.5 3.5 3.0
----- ----- -----
Net income ............................. 8.2% 6.7% 6.0%
===== ===== =====

Net Sales. Net sales increased 88% from $23.4 million in fiscal 1995 to
$44.0 million in fiscal 1996 and 72% to $75.8 million in fiscal 1997. In fiscal
1996 and fiscal 1997, these increases resulted primarily from increased demand
for the Company's Full-Flow systems by companies in the semiconductor and FPD
industries as the Company's customers equipped new facilities or expanded
facilities, resulting in multiple systems purchases by some of the Company's
major customers, and initial sales to new customers. Net sales for fiscal 1996
and fiscal 1997 included sales of Full-Flow systems to companies in the FPD
manufacturing industry representing approximately 20% and 24% of net sales,
respectively. The Company believes that capital expenditures in the FPD
manufacturing industry are subject to significant variations and expects that
its FPD sales as a percentage of total sales will fluctuate as the Company
attempts to penetrate new accounts. Sales of FPD Full-Flow systems to LG
Semiconductor, a manufacturer located in Korea, represented 88% of all FPD sales
during fiscal 1997. The Company believes that FPD Full-Flow system sales will
represent a smaller portion of net sales during fiscal 1998. International sales
represented 52%, 63% and 65% of total net sales, in fiscal 1995, 1996 and 1997,
respectively. The number of international customers receiving shipments of the
Company's systems increased in both fiscal 1996 and 1997. The Company expects
international sales to continue to represent a significant portion of its net
sales as a result of continuing expansion of its international sales, service
and support organization. For a description of recent economic events in Korea,
Taiwan and other Asian countries and their effects on the Company, see
"Overview".

38
<PAGE>

Gross Profit. Gross profit as a percentage of net sales increased to 47.0%
in fiscal 1996 from 42.5% in fiscal 1995 due to increases in manufacturing and
procurement efficiencies because of increased volume. Gross margin in fiscal
1997 remained substantially constant at 47.1%. The level of gross profit in
fiscal 1996 and fiscal 1997 can be attributed to a mix of increases in sales
prices, changes in product mix, reductions in the cost of component parts due to
volume and manufacturing efficiencies resulting from increased volume and the
expansion of the Company's manufacturing facilities.

Research, Development and Engineering. Research, development and
engineering expenses increased from $1.7 million or 7.3% of net sales in fiscal
1995 to $4.4 million or 10.0% of net sales in fiscal 1996 and further increased
to $9.3 million or 12.3% of net sales in fiscal 1997. The substantial increase
in research, development and engineering spending in fiscal 1996 is attributable
to the Company's completion in March 1996 of development of a Full-Flow system
configured to process 100 wafers per vessel and the release of this system's
design to the Company's manufacturing division. In addition, during fiscal 1996
the Company incurred substantial research, development and engineering expenses
in support of the development of its first Full-Flow system for use in
manufacturing flat panel displays. The further significant increase in research,
development and engineering spending which occurred in fiscal 1997 is
attributable to the development of a much larger Full-Flow FPD system which was
first delivered in June 1997. Additionally, the Full-Flow 8150, capable of
processing 150 wafers in a single vessel, was introduced in October 1997. The
Company is developing a version of the Full-Flow platform to process 300mm
semiconductor wafers and anticipates that production systems will be available
for shipment in the first half of fiscal 1998. The Company believes that a
substantial investment in research, development and engineering is critical to
maintaining a strong technological position and accordingly expects such
expenses in fiscal 1998 will increase over the 1997 level.

Selling, General and Administrative. Selling, general and administrative
expenses increased from $6.0 million or 25.5% of net sales in fiscal 1995 to
$11.7 million or 26.5% of net sales in fiscal 1996 and to $19.4 million or 25.6%
of net sales in fiscal 1997. The increases in fiscal 1996 and 1997 resulted
primarily from increases in sales and marketing costs related to increased
customer support and increased international sales, and legal expenses related
to litigation undertaken to protect one of the Company's patents. The Company
believes that selling, general and administrative expenses will increase in
fiscal 1998 and beyond, as increased personnel and sales and support expenses
are anticipated in connection with the Company's efforts to increase its net
sales and as the Company continues to invest in developing and protecting its
patents and other intellectual property rights.

39
<PAGE>

Interest (Income) Expense, Net. Interest expense, net of interest income,
of $0.2 million in fiscal 1995 and 1996 represented 0.7% and 0.3% of net sales,
respectively. In fiscal 1997, interest income, net of interest expense, was $1.9
million or 2.5% of net sales. The Company incurred interest expenses due to
intra-period borrowings on its revolving line of credit during fiscal 1995 and
1996 which borrowings were utilized to support the Company's increased working
capital requirements. In fiscal 1997, net interest income was earned as a result
of the investment of funds not immediately required for the Company's operations
which were available as a result of the Company's initial public offering in
June 1996 and a follow-on offering in February 1997.

Income Taxes. The Company's effective tax rate increased from 33.4% in
fiscal 1995 to 34.0% in fiscal 1996 and decreased to 30.0% in fiscal 1997. The
rate for fiscal 1995 reflects a reduction in the research and development tax
credit because of lower research, development and engineering expenses. The rate
for fiscal 1996 reflects the unavailability of the research and development tax
credit during the majority of the year. In contrast, the rate for fiscal 1997
reflects tax benefits from the research and development tax credit along with
significant tax benefits from the Company's Foreign Sales Corporation as a
result of the Company's export sales.

LIQUIDITY AND CAPITAL RESOURCES

Since its inception, the Company has funded its capital requirements
through funding from two research and development limited partnerships, the sale
of private equity securities, the Company's initial public offering of Common
Stock completed in June 1996, a follow-on offering of Common Stock completed in
February 1997 and, to a lesser extent, bank borrowings and equipment leases. As
of October 31, 1997, the Company had $46.2 million in cash, cash equivalents and
short-term investments and $81.8 million in working capital.

Net cash used in operating activities was $0.4 million, $3.6 million and
$12.1 million for fiscal 1995, 1996 and 1997, respectively. Increases in
accounts receivable and inventories were $6.2 million and $4.3 million,
respectively, in fiscal 1996 and $18.3 million and $8.0 million, respectively,
in fiscal 1997. During fiscal 1997, accounts receivable increased due to higher
revenues and customer payment delays due to added review on initial sales of
production systems by customer production personnel prior to receivable payment.
This review is sometimes time consuming and precedes receipt of the final
payment amount negotiated as a part of the original purchase agreement.
Subsequent deliveries of similar products usually result in significantly more
rapid collection of final amounts owed. A similar situation can occur with
initial installations at new customer sites as personnel unfamiliar with
Full-Flow systems receive training. Accounts receivable balances are expected to
continue to fluctuate with the volume of shipments of certain products and of
products to new customer sites.

40
<PAGE>

Purchases of property, plant and equipment were $2.9 million and $4.3
million in fiscal 1996 and 1997, respectively. These expenditures were primarily
related to fit-up of the Company's new leased office facility and acquisition of
an advanced three-dimensional computer-aided design system for use in the
Company's research, development and engineering activities in fiscal 1996 and
for improvements in information systems infrastructure, expansion of the
Company's applications laboratory, additional customer and employee training
facilities and expanded production capacity in fiscal 1997.

During fiscal 1997, the Company leased an additional 22,000 square feet of
space in a facility in the same industrial park as its owned manufacturing and
leased administrative facilities to house a portion of the Company's production
operations and its customer satisfaction function. The Company also entered into
a lease with a minimum term of 20 years for two facilities, a 60,000 square foot
production facility and a 80,000 square foot office facility, to be built in
Exton, Pennsylvania, approximately 7 miles from the site of the Company's
current operations. The Company intends to retain its owned facility in West
Chester, Pennsylvania for use in manufacturing, customer and employee training
and research and development while moving all other functions to Exton late in
the fall of 1998.

The Company has a relationship with a commercial bank which includes a
mortgage on the Company's manufacturing facility in the amount of $0.9 million
and a $7.5 million revolving demand line of credit. The mortgage bears interest
at an annual rate of 8.9%. The line of credit is unsecured and borrowings are at
an interest rate equal to such bank's prime rate. There were no borrowings at
October 31, 1997.

The Company also has mortgage notes payable to the Pennsylvania Industrial
Development Authority in the amount of $0.6 million bearing interest at 2.0% and
to the Chester County Development Council in the amount of $0.1 million bearing
interest at 5.0%. In addition, the Company has outstanding capital lease
obligations in the amount of $1.6 million bearing interest at rates ranging from
7% to 12% per annum.

The Company had outstanding accounts receivable of approximately $15.1
million and $33.4 million as of October 31, 1996 and 1997, respectively. No
allowance for doubtful accounts receivable has been recorded as the Company
believes that all such accounts receivable are fully realizable.

The Company believes that existing cash balances and its available line of
credit will be sufficient to meet the Company's cash requirements through the
next 12 months. However, depending upon its rate of growth and profitability,
the Company may require additional equity or debt financing to meet its working
capital requirements or capital expenditure needs. There can be no assurance
that additional financing, if needed, will be available when required, or, if
available, will be on terms satisfactory to the Company.

41
<PAGE>

The discussions above regarding the Company's expectations of future sales,
gross profits, research, development and engineering expenses, selling, general
and administrative expenses, product introductions and cash requirements include
certain forward-looking statements on these subjects. As such, actual results
may vary materially from such expectations. Factors which could cause actual
results to differ from expectations include variations in the level of orders,
which can be affected by general economic conditions and growth rates in
specific geographic areas where the Company may have a concentration of
business, in the semiconductor and FPD manufacturing industries and in the
markets served by the Company's customers, the international economic and
political climates, difficulties or delays in product functionality or
performance, the delivery performance of sole source vendors, the timing of
future product releases, failure to respond adequately to either changes in
technology or customer preferences, changes in pricing by the Company or its
competitors, ability to manage growth, risks of non-payment of accounts
receivable, changes in budgeted costs or failure to realize a successful outcome
to pending patent litigation, all of which constitute significant risks. There
can be no assurance that the Company's results of operations will not be
adversely affected by one of more of these factors.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

During fiscal 1997, the Company adopted Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of " (SFAS No. 121) which requires impairment
losses to be recorded on long-lived assets used in operations when indicators of
impairment are present and undiscounted cash flows estimated to be generated by
those assets are less than the assets carrying amount. SFAS No. 121 also
addresses the accounting for long-lived assets where disposal is expected. The
adoption of SFAS No. 121 did not have any impact on the Company's financial
position or results of operations.

In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS No.128).
SFAS No. 128 is effective for fiscal years beginning after December 15, 1997.
SFAS No. 128 simplifies the earnings per share (EPS) calculation by replacing
primary EPS with basic EPS and replacing fully diluted EPS with diluted EPS.
Basic EPS is computed by dividing reported earnings available to common
shareholders by the weighted average shares outstanding. Diluted EPS reflects
the potential dilution from the exercise or conversion of securities into common
stock, such as stock options. Early application is prohibited, although footnote
disclosure of pro forma EPS amounts are required. Pro forma basic EPS and
diluted EPS would have been as follows:

42
<PAGE>

Year Ended
October 31,
---------------------------
1997 1996 1995
---- ---- ----

Pro forma basic earnings per share ............ $ .85 $ .64 $ .37
Pro forma diluted earnings per share .......... $ .80 $ .61 $ .35
Weighted average common shares outstanding used
for pro forma basic earnings per share (000) 7,318 4,624 3,802
Dilutive effect of common stock options
outstanding (000) ........................... 446 207 192
Weighted average common and common
equivalent shares
outstanding used for pro forma
diluted earnings per share (000) ............ 7,764 4,831 3,994

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, " Reporting Comprehensive Income" (SFAS
No. 130). SFAS No. 130 is effective for fiscal years beginning after December
15, 1997. SFAS No. 130 establishes standards for the reporting and display of
comprehensive income in a set of financial statements. Comprehensive income is
defined as the change in net assets of a business enterprise during a period
from transactions generated from non-owner sources. It includes all changes in
equity during a period except those resulting from investments by owners and
distributions to owners. Management believes that the adoption of SFAS No. 130
will not have a material impact on the Company's financial statements.

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 "Disclosures about Segments of an
Enterprise and Related Information" (SFAS No. 131). SFAS No. 131 applies to all
public companies and is effective for fiscal years beginning after December 15,
1997. SFAS No. 131 requires that business segment financial information be
reported in the financial statements utilizing the management approach. The
management approach is defined as the manner in which management organizes the
segments within the enterprise for making operating decisions and assessing
performance. Management believes the adoption of SFAS No. 131 will not have a
material impact on the Company's financial statements.

EFFECTS OF INFLATION

Inflation has not been a material factor affecting the Company's business.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The audited financial statements of the Company appear beginning on Page
F-1 of this report.

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

None.

43
<PAGE>

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this Item will be set forth in the Company's
definitive Proxy Statement, to be filed within 120 days after the end of the
fiscal year covered by this Annual Report on Form 10-K, and is incorporated by
reference to the Proxy Statement.

ITEM 11. EXECUTIVE COMPENSATION

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

44
<PAGE>

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

FINANCIAL STATEMENTS

The financial statements and financial statement information required by
this Item are included on pages F-1 through F-22 of this report. The Report of
Independent Public Accountants appears on page F-2 of this report. All other
schedules have been omitted because they are inapplicable, not required, or the
information is included elsewhere in the financial statements or notes thereto.

EXHIBITS

The following is a list of exhibits. Where so indicated by footnote,
exhibits which were previously filed are incorporated by reference. For exhibits
incorporated by reference, the location of the exhibit in the previous filing is
indicated in parentheses.

EXHIBIT
NUMBER
- ------

3.1 Articles of Incorporation of CFM Technologies, Inc., as amended*

3.1.1 Amendment to Articles of Incorporation.**

3.2 By-Laws of CFM Technologies, Inc.*

4.1 Form of Common Stock Certificate.*

4.2 Statement with Respect to Shares filed with the Pennsylvania
Department of State on May 1, 1997.

10.1 Employment Agreement dated as of January 9, 1995 by and between CFM
Technologies, Inc. and Lorin Jeffry Randall.*

10.2 Stock Option Agreement dated March 18, 1991 between CFM Technologies,
Inc. and Burton McGillivray, as extended and amended on June 11,1993
and as amended on September 25, 1994.*

10.3 Stock Option Agreement dated as of December 9, 1994 by and between CFM
Technologies,Inc. and Milton Stearns, as amended on November 3, 1995.*

10.4 CFM Technologies, Inc. Annual Profit Sharing Plan.*

10.4.1 Amendment to CFM Technologies, Inc. Annual Profit Sharing Plan.***

10.5 CFM Technologies, Inc. 1992 Employee Stock Option Plan.*

10.6 Amended and Restated CFM Technologies, Inc. 1995 Incentive Plan.****

10.7 Amended and Restated CFM Technologies, Inc. Non-Employee Directors'
Stock Option Plan.****

10.8 CFM Technologies, Inc. Employee Stock Purchase Plan.*

10.9 Rights Agreement dated as of April 24, 1997 between CFM Technologies,
Inc. and American Stock Transfer and Trust Co., as Rights Agent.*****

<PAGE>

10.10 Distributor Agreement dated November 28, 1991 by and between ANAM
Semiconductor Design Co., Ltd. and CFM Technologies, Incorporated, and
supplement to the Distributor Agreement dated August 26,1994.*

10.11 Distributor Agreement dated March 3, 1992 by and between Innotech
Corporation and CFM Technologies, Inc., as modified on June 15,1994.*

10.12 Lease Agreement dated October 10, 1995 by and between Hough/Loew
Construction, Inc. and CFM Technologies. Inc. and Addendum to Lease
Agreement dated October 10,1995.*

10.12.1 Amendment Number Two to Lease Agreement dated April 30, 1996 by and
between and CFM Technologies. Inc. Hough/Loew Construction, Inc.***

10.13 Commercial Lease Agreement dated December 16, 1996 between CFM
Technologies, Inc. and Devereau Properties, Inc.***

10.13.1 First Amendment to Commercial Lease Agreement dated August 22, 1997
between CFM Technologies, Inc. and Devereau Properties, Inc.

10.14 Loan Agreement dated July 27, 1994 by and between Chester County
Development Council("CCDC") and CFM Technologies, Incorporated.*

10.15 $100,000 Mortgage dated as of July 27, 1994, CFM Technologies,
Incorporated to CCDC.*

10.16 Guaranties dated October 13, 1995 executed by CFMT, Inc. and CFM
International Corp. in favor of Corestates Bank, N.A. ("CoreStates").*

10.17 Mortgage dated February 16, 1994 between CFM Technologies,
Incorporated and Corestates.*

10.18 $150,000 Commercial Promissory Note dated September 28, 1994 from CFM
Technologies, Incorporated to Corestates.*

10.19 $100,000 Commercial Promissory Note dated August 11, 1994 from CFM
Technologies, Incorporated to Corestates.*

10.20 Assignment of Leases, Rents, Agreements of Sale, Licenses and Permits
dated February 16, 1994 by CFM Technologies, Inc. to CoreStates.*

10.21 Agent Agreement dated December 16, 1996 between CFM Technologies, Inc.
and Ampoc Far East Company Limited.***

10.22 Letter Agreement dated March 25, 1996 between CoreStates and CFM
Technologies, Inc. and $7,500,000 Master Demand Note dated April 1,
1996 from CFM Technologies, Inc. to CoreStates.*

10.23 Lease Agreement dated July 16, 1997 between CFM Technologies, Inc. and
CFM Partners (No relationship with CFM Technologies, Inc.).

10.24 Agent Agreement dated April 15, 1997 by and between Aneric Enterprise
PTE Limited and CFM Technologies, Inc.

10.25 Agent Agreement dated October 29, 1997 by and between Silicon
International Ltd. and CFM Technologies, Inc.

11 Statement re computation of per share earnings.

21 Subsidiaries of the Registrant.

<PAGE>

23.1 Consent of Arthur Andersen LLP.

27 Financial Data Schedule.

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

* Incorporated by reference to the Registrant's Registration Statement
Form S-1 (Registration No. 33-80359) declared effective on June 18,
1996.

** Incorporated by reference to the Registrant's definitive Proxy Statement
dated and filed on February 13, 1997.

*** Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (Registration No. 333-20325), filed on January 24, 1996, and
the Amendment No. 1 to such Registration Statement filed on January 27,
1996.

**** Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the quarter ended April 30, 1997.

***** Incorporated by reference to the Registrant's Registration Statement on
Form 8-A filed on April 24, 1997.

REPORTS ON FORM 8-K

The Company filed no reports on Form 8-K during the quarter ended October
31, 1997.

47
<PAGE>

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Public Accountants ................................F-2

Consolidated Balance Sheets as of October 31, 1997 and 1996 .............F-3

Consolidated Statements of Income for the years ended
October 31, 1997, 1996 and 1995 ...................................F-4

Consolidated Statements of Shareholders' Equity for the years ended
October 31, 1997, 1996 and 1995....................................F-5

Consolidated Statements of Cash Flows for the years ended
October 31, 1997, 1996 and 1995 ...................................F-6

Notes to Consolidated Financial Statements ..............................F-7

F-1
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To CFM Technologies, Inc.:

We have audited the accompanying consolidated balance sheets of CFM
Technologies, Inc. (a Pennsylvania corporation) and subsidiaries as of October
31, 1997 and 1996, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended October 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of CFM Technologies, Inc. and
subsidiaries as of October 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
October 31, 1997, in conformity with generally accepted accounting principles.

Arthur Andersen LLP

Philadelphia, Pa.,
December 12, 1997

<PAGE>

CFM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

OCTOBER 31, OCTOBER 31,
1997 1996
---- ----
(IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .................. $ 26,865 $ 9,308
Short-term investments ..................... 19,316 2,946
Accounts receivable ........................ 33,392 15,090
Inventories ................................ 16,081 8,047
Prepaid expenses and other ................. 1,709 362
Deferred income taxes ...................... 1,371 641
--------- ---------
Total current assets .................... 98,734 36,394
--------- ---------
PROPERTY, PLANT AND EQUIPMENT:
Land ....................................... 540 540
Building and improvements .................. 3,782 3,180
Machinery and equipment .................... 8,106 4,075
Furniture and fixtures ..................... 1,337 934
--------- ---------
13,765 8,729
Less - Accumulated depreciation and
amortization ............................ (3,562) (1,268)
--------- ---------
Net property, plant and equipment ..... 10,203 7,461
--------- ---------
OTHER ASSETS ................................... 559 396
--------- ---------
$ 109,496 $ 44,251
========= =========

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
Current portion of long-term debt .......... $ 617 $ 489
Accounts payable ........................... 7,709 4,929
Accrued expenses ........................... 8,612 3,451
--------- ---------
Total current liabilities .............. 16,938 8,869
--------- ---------
LONG-TERM DEBT ................................. 2,571 2,525
--------- ---------
DEFERRED INCOME TAXES .......................... 119 146
--------- ---------
COMMITMENTS AND CONTINGENCIES (Note 16)

SHAREHOLDERS' EQUITY:
Preferred stock, no par value; 1,000,000
authorized shares; no shares issued or
outstanding .............................. -- --
Common stock, no par value; 30,000,000
authorized shares; 7,913,588 and 6,052,924
shares issued and outstanding ............ 80,762 29,592
Deferred compensation ...................... (235) --
Retained earnings .......................... 9,341 3,119
--------- ---------
Total shareholders' equity ............. 89,868 32,711
--------- ---------
$ 109,496 $ 44,251
========= =========

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

F-3
<PAGE>

CFM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME

YEAR ENDED OCTOBER 31,
-------------------------------------
1997 1996 1995
---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)

NET SALES ........................ $ 75,772 $ 44,013 $ 23,430
COST OF SALES .................... 40,072 23,317 13,463
-------- -------- --------
Gross profit ................ 35,700 20,696 9,967
-------- -------- --------
OPERATING EXPENSES:
Research, development and
engineering .................. 9,334 4,375 1,717
Selling, general and
administrative ............... 19,360 11,679 5,972
-------- -------- --------
Total operating expenses .... 28,694 16,054 7,689
-------- -------- --------
Operating income ............ 7,006 4,642 2,278

INTEREST (INCOME) ................ (2,163) (271) (72)
INTEREST EXPENSE ................. 281 428 245
-------- -------- --------
Income before income taxes ..... 8,888 4,485 2,105
INCOME TAXES ..................... 2,666 1,525 703
-------- -------- --------
NET INCOME ....................... $ 6,222 $ 2,960 $ 1,402
======== ======== ========
NET INCOME PER SHARE ............. $ 0.80 $ 0.61 $ 0.35
======== ======== ========
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES .............. 7,764 4,831 3,994
======== ======== ========

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

F-4

<PAGE>

CFM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

DEFERRED RETAINED
COMMON STOCK COMPEN- EARNINGS
SHARES AMOUNT SATION (DEFICIT) TOTAL
------ ------ ------ --------- -----
(IN THOUSANDS)

<S> <C> <C> <C> <C> <C>
BALANCE, OCTOBER 31, 1994 .......... 3,393 $ 6,352 $ -- $(1,243) $ 5,109

Common stock issued for services . 2 15 -- -- 15

Exchange of common stock for
Partnership Interests .......... 408 3,249 -- -- 3,249

Net income ....................... -- -- -- 1,402 1,402
----- ------- ------- ------- -------
BALANCE, OCTOBER 31, 1995 .......... 3,803 9,616 -- 159 9,775

Proceeds from sale of common 2,250 19,976 -- -- 19,976
stock, net
Net income ....................... -- -- -- 2,960 2,960
----- ------- ------- ------- -------
BALANCE, OCTOBER 31, 1996 .......... 6,053 29,592 -- 3,119 32,711

Proceeds from sale of common
stock, net ..................... 1,751 49,288 -- -- 49,288
Proceeds from exercise of
stock options................... 96 545 -- -- 545
Tax benefit from exercise of stock
options ........................ -- 764 -- -- 764
Deferred compensation charge ..... -- 317 (317) -- --
Amortization of deferred
compensation..................... -- -- 82 -- 82
Common stock issued under
Employee Stock Purchase Plan ... 14 256 -- -- 256
Net income ....................... -- -- -- 6,222 6,222
----- ------- ------- ------- -------
BALANCE, OCTOBER 31, 1997 .......... 7,914 $80,762 $ (235) $ 9,341 $89,868
===== ======= ======= ======= =======

</TABLE>

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

F-5
<PAGE>

CFM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

Year Ended October 31,
----------------------------------------
1997 1996 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income ..................................... $ 6,222 $ 2,960 $ 1,402
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization ................ 2,317 881 224
Deferred compensation ........................ 82 -- --
Deferred income tax benefit .................. (757) (41) (251)
(Increase) in:
Accounts receivable ........................ (18,302) (6,204) (2,887)
Inventories ................................ (8,034) (4,347) (358)
Prepaid expenses and other ................. (1,347) (178) (12)
Other assets ............................... (186) (59) (94)
Increase in:
Accounts payable ........................... 2,780 2,392 1,044
Accrued expenses ........................... 5,161 963 567
-------- -------- --------
Net cash used in operating activities .... (12,064) (3,633) (365)
-------- -------- --------

INVESTING ACTIVITIES:
Purchases of short-term investments ............ (44,245) (4,366) --
Proceeds from short-term investments ........... 27,875 1,420 --
Purchases of property, plant and equipment ..... (4,286) (2,891) (1,311)
-------- -------- --------
Net cash used in investing activities .... (20,656) (5,837) (1,311)
-------- -------- --------

FINANCING ACTIVITIES:
Payments on long-term debt ..................... (576) (1,606) (388)
Proceeds from long-term debt ................... -- -- 1,241
Proceeds from sale of common stock, net ........ 49,544 19,976 125
Proceeds from exercise of stock options ........ 545 -- --
Tax benefits from exercise of stock options .... 764 -- --
-------- -------- --------
Net cash provided by financing activities .. 50,277 18,370 978
-------- -------- --------

NET INCREASE(DECREASE)IN CASH
AND CASH EQUIVALENTS ............................. 17,557 8,900 (698)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ..... 9,308 408 1,106
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD ........... $ 26,865 $ 9,308 $ 408
======== ======== ========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest expense ................. $ 284 $ 444 $ 197
Cash received for interest income .............. 1,975 251 72
Cash paid for income taxes ..................... 2,031 1,949 730
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Machinery acquired under capital leases ....... $ 750 $ 1,041 $ 398
Common stock issued for Partnership interests . -- -- 3,249
Common stock issued for services .............. -- -- 15

</TABLE>

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

F-6
<PAGE>

CFM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. DESCRIPTION OF BUSINESS:

CFM Technologies, Inc. (the Company) designs, manufactures and markets
advanced wet processing equipment for sale to the worldwide semiconductor and
flat panel display industries.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Principles of Consolidation

The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated.

Use of Estimates

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

Cash, Cash Equivalents and Short-Term Investments

The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents. Short-term
investments are carried at amortized cost which equals market value. The
investments have various maturity dates which do not exceed one year. All of the
Company's short-term investments are classified as available for sale pursuant
to Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" (SFAS 115). Therefore any unrealized
holding gains or losses would be presented as a separate component of
shareholders' equity. At October 31, 1997 and 1996, there were no material
unrealized holding gains or losses. The gross proceeds from sales and maturities
of investments were $27,875,000 and $1,420,000 for the years ended October 31,
1997 and 1996. Gross realized gains and losses for the years ended October 31,
1997 and 1996 were not material. For the purpose of determining gross realized
gains and losses, the cost of securities sold is based upon specific
identification.

F-7
<PAGE>

Cash and cash equivalents and short-term investments consisted of the
following:

October 31,
----------------------------
1997 1996
---- ----
Cash and cash equivalents:
Municipal and government securities. $17,402,000 $ --
Money market funds and demand
accounts ........................ -- 4,257,000
Commercial paper ................... 5,283,000 495,000
Repurchase agreements .............. 4,180,000 4,556,000
----------- -----------
$26,865,000 $ 9,308,000
=========== ===========

Short-term investments:
Municipal and government securities $15,684,000 $ --
Commercial paper .................. 3,632,000 1,472,000
Mortgage-backed government
securities ...................... -- 1,474,000
----------- -----------
$19,316,000 $ 2,946,000
=========== ===========

Inventories

Inventories are valued at the lower of first-in, first-out cost or market.

Property, Plant and Equipment

Property, plant and equipment are recorded at cost. Significant
improvements are capitalized and expenditures for maintenance and repairs are
charged to expense as incurred. Upon the sale or retirement of these assets, the
cost and related accumulated depreciation are removed from the accounts and any
gain or loss is included in income.

Depreciation and amortization are provided using the straight-line method
based on the estimated useful lives of the assets as follows:

Building and improvements .................. 5-40 years
Machinery and equipment .................... 3-10 years
Furniture and fixtures ..................... 5-10 years

Depreciation and amortization expense was $2,294,000, $862,000 and $207,000
in fiscal 1997, 1996 and 1995, respectively.

Revenue Recognition

Net sales are generally recognized upon shipment of the system and, if
recognized prior to shipment, upon completion of customer inspection or
acceptance where risk of loss is transferred to the customer. The estimated
costs of system installation and warranty are accrued when the related sale is
recognized.

F-8
<PAGE>

Research, Development and Engineering Expenses

Research, development and engineering expenses are charged to expense as
incurred. Research, development and engineering expenses were net of
reimbursement of $890,000, $1,592,000 and $232,000 in fiscal 1997, 1996 and
1995, respectively.

Engineering expenses consist of personnel and material costs related to the
development of new products and the integration of existing products into
application-specific systems.

Income Taxes

The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109). SFAS
No. 109 requires the liability method of accounting for deferred income taxes.
Deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax bases of assets and liabilities.
Deferred tax assets or liabilities at the end of each period are determined
using the tax rate expected to be in effect when taxes are actually paid or
recovered.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentration
of credit risk are accounts receivable. The Company's customer base principally
comprises companies within the semiconductor industry, which historically has
been volatile. The Company does not require collateral from its customers.

Fair Value of Financial Instruments

The Company's financial instruments consist primarily of cash and cash
equivalents, short-term investments, accounts receivable, accounts payable,
accrued expenses and debt instruments. The book values of cash and cash
equivalents, short-term investments, accounts receivable, accounts payable and
accrued expenses are considered to be representative of their respective fair
values. None of the Company's debt instruments that are outstanding as of
October 31, 1997 have readily ascertainable market values; however, the carrying
values are considered to approximate their respective fair values. See Note 7
for the terms and carrying values of the Company's various debt instruments.

Net Income Per Share

Net income per common share was calculated by dividing net income by the
weighted average number of common shares outstanding for the respective period
adjusted for the dilutive effect of common stock equivalents, which consist of
stock options using the treasury stock method. Pursuant to the requirements of
the Securities and Exchange Commission, common stock issued by the Company
during the twelve months immediately preceding the initial public offering in
June 1996, plus the number of common equivalent shares which became issuable
during the same period pursuant to the grant of common stock options, have

F-9
<PAGE>

been included in the calculation of the shares used in computing net income per
share for fiscal 1996 and 1995 as if they were outstanding for all periods
presented (using the treasury stock method and the initial public offering price
of $10.00 per share).

New Accounting Pronouncements

During fiscal 1997, the Company adopted Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of "(SFAS No. 121) which requires impairment
losses to be recorded on long-lived assets used in operations when indicators of
impairment are present and undiscounted cash flows estimated to be generated by
those assets are less than the assets carrying amount. SFAS No. 121 also
addresses the accounting for long-lived assets where disposal is expected. The
adoption of SFAS No. 121 did not have any impact on the Company's financial
position or results of operations.

Year Ended
October 31,
----------------------------
1997 1996 1995
---- ---- ----

Pro forma basic earnings per share ............ $ .85 $ .64 $ .37

Pro forma diluted earnings per share .......... $ .80 $ .61 $ .35

Weighted average common shares outstanding used
for pro forma basic earnings per share (000) 7,318 4,624 3,802

Dilutive effect of common stock options
outstanding (000) ........................... 446 207 192

Weighted average common and common equivalent
shares outstanding used for pro forma diluted
earnings per share (000) .................... 7,764 4,831 3,994

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 " Reporting Comprehensive Income" (SFAS
No. 130). SFAS No. 130 is effective for fiscal years beginning after December
15, 1997. SFAS No. 130 establishes standards for the reporting and display of
comprehensive income in a set of financial statements. Comprehensive income is
defined as the change in net assets of a business enterprise during a period
from transactions generated from non-owner sources. It includes all changes in
equity during a period except those resulting from investments by owners and
distributions to owners. Management believes that the adoption of SFAS No. 130
will not have a material impact on the financial statements.

F-10
<PAGE>

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 "Disclosures about Segments of an
Enterprise and Related Information" (SFAS No. 131). SFAS No. 131 applies to all
public companies and is effective for fiscal years beginning after December 15,
1997. SFAS No. 131 requires that business segment financial information be
reported in the financial statements utilizing the management approach. The
management approach is defined as the manner in which management organizes the
segments within the enterprise for making operating decisions and assessing
performance. Management believes that the adoption of SFAS No. 131 will not have
a material impact on the financial statements.

Reclassifications

Certain reclassifications of previously reported balances have been made to
conform with the current year classification of such balances.

3. ACCOUNTS RECEIVABLE:
October 31,
----------------------------
1997 1996
---- ----

Billed........................................... $21,944,000 $10,558,000

Unbilled......................................... 11,448,000 4,532,000
----------- -----------
$33,392,000 $15,090,000
=========== ===========

Unbilled receivables represent final retainage amounts to be billed upon
completion of the installation process.

As of October 31, 1997 the Company had outstanding accounts receivable
totaling $10,939,000 from one customer who purchased several of the Company's
systems for Korean installations.

No allowance for doubtful accounts receivable has been recorded because the
Company believes that all such accounts receivable are fully realizable.

F-11
<PAGE>

4. INVENTORIES:
October 31,
---------------------------
1997 1996
---- ----

Raw material..................................... $ 8,373,000 $4,267,000
Work in progress................................. 7,708,000 3,780,000
----------- ----------
$16,081,000 $8,047,000
=========== ==========

5. LINE OF CREDIT:

The Company has a $7,500,000 unsecured demand line of credit with a bank.
The line of credit agreement does not have a stated maturity or expiration date;
however, outstanding borrowings are due upon demand by the bank. Interest is
charged at the bank's prime rate and was 8.25% and 8.75% at October 31, 1997 and
1996, respectively. The line also provides for the issuance of letters of
credit. As of October 31, 1997 and 1996, the Company had no borrowings on the
line. The line of credit requires the Company to maintain certain financial and
other covenants, including a minimum tangible net worth and minimum cash flow to
debt service coverage ratio.

6. ACCRUED EXPENSES:

October 31,
------------------------
1997 1996
---- ----
Warranty and installation costs.............. $2,277,000 $1,069,000
Payroll and payroll related.................. 1,932,000 1,010,000
Accrued commissions ......................... 3,080,000 1,004,000
Other.......................................... 1,323,000 368,000
---------- ----------
$8,612,000 $3,451,000
========== ==========

F-12

<PAGE>

7. LONG-TERM DEBT:

<TABLE>
<CAPTION>
October 31,
----------------------------
1997 1996
---- ----
<S> <C> <C>
Mortgage note payable to bank, payable in monthly installments of $6,250
plus interest at 8.9% through February 2009, collateralized by land
and building ...................................................... $ 850,000 $ 925,000

Mortgage note payable to Pennsylvania Industrial Development Authority
(PIDA), payable in monthly installments of $4,363 including interest
at 2% through August 2009, collateralized by land and building....... 551,000 592,000

Mortgage note payable to Chester County Development Council, payable in
monthly installments of $1,067 including interest at 5% through
August 2004, collateralized by land and building..................... 74,000 82,000

Term notes payable to bank, payable in monthly installments of $5,834
plus interest at the bank's prime rate plus 1% through August 1999,
collateralized by certain assets..................................... 123,000 194,000

Capitalized lease obligations, lease periods expiring at various dates
through 2002, interest rates range from 7% to 12%, collateralized by
the leased assets.................................................... 1,590,000 1,221,000
----------- ----------
33,188,000 3,014,000

Less - Current portion ................................................ (617,000) (489,000)
------------ ----------
$ 2,571,000 $2,525,000
=========== ==========

</TABLE>

F-13
<PAGE>

Maturities of long-term debt as of October 31, 1997 are as follows:

FISCAL YEAR
-----------
1998.......................$ 617,000
1999 ...................... 610,000
2000 ...................... 534,000
2001 ...................... 422,000
2002 ...................... 159,000
2003 and therefter ........ 846,000
----------
$3,188,000
==========

The mortgage note due to PIDA contains certain financial covenants, the
most restrictive of which requires minimum levels of shareholders' equity.

The Company leases machinery and equipment and furniture and fixtures under
capital leases expiring in various years through 2002. The assets and
liabilities under these leases are recorded at the lower of the present value of
the minimum lease payments or the fair value of the asset. The assets are
depreciated over their estimated useful lives since ownership will transfer upon
lease expiration. The net book value of equipment under capitalized lease
obligations as of October 31, 1997 is $1,494,000. The minimum lease payments,
including interest, under the capital lease obligations as of October 31, 1997
are $545,000, $496,000, $437,000, $292,000 and $16,000 for fiscal 1998, 1999,
2000, 2001 and 2002, respectively.

8. RESEARCH AND DEVELOPMENT LIMITED PARTNERSHIPS:

In 1984 and 1985, the Company entered into research and development
agreements with two related party limited partnerships (the Partnerships), in
which the Company was the general partner. A significant number of the
individuals who were limited partners were also significant shareholders of the
Company. Due to this related party relationship, the cash that was paid by the
Partnerships to the Company was recorded as an obligation due to the
Partnerships and interest was accrued thereon. In April 1987 and September 1988,
the Company exercised its purchase options to acquire the Partnerships'
technologies, which resulted in an aggregate liability of $2,184,000. The
obligation due to the Partnerships increased by scheduled amounts which
aggregated $5,030,000 through October 31, 1994 and were recorded as interest
expense. In fiscal 1994, $728,000 of interest expense was recorded. The Company
made payments to the Partnerships of $1,612,000 on a cumulative basis through
October 31, 1994. As of October 31, 1994, deferred taxes of $2,353,000 were
recorded for differences in financial statement and income tax reporting with
respect to this obligation. On November 1, 1994, the Company exchanged 408,339
shares of its common stock for the assets of the Partnerships, which consisted
primarily of the Company's obligation to the Partnerships. The fair value of
these common shares approximated the obligation due to the Partnerships, net of
tax. Accordingly, no gain or loss was recognized as a result of this
transaction.

F-14
<PAGE>

9. SHAREHOLDERS' EQUITY:

On April 17, 1997, the Company's Board of Directors adopted a Shareholder
Rights Plan designed to protect the Company's shareholders in the event of an
attempt to acquire control of the Company on terms which do not deal fairly with
all of the Company's shareholders. Terms of the Rights Plan provide for a
dividend distribution of one right for each share of Common Stock to holders of
record at the close of business on May 9, 1997. The rights will become
exercisable only in the event, with certain exceptions, an acquiring party
accumulates, or announces an offer to acquire, 20% or more of the Company's
Common Stock. The rights will expire on April 24, 2007. Each right will entitle
the holder to buy one one-hundredth of a share of a new series of preferred
stock at a price of $180. In addition, upon the occurrence of certain events,
holders of the rights will be entitled to purchase either Company stock or
shares in an "acquiring entity" at half of market value. The Company will
generally be entitled to redeem the rights at $.001 per right at any time until
the tenth day following the acquisition of 20% of its Common Stock.

On February 19, 1997, the Company consummated a follow-on public offering
of its Common Stock. The Company sold 1,750,500 (including the underwriters'
over-allotment) shares of its Common Stock, no par value, at an offering price
of $30.00 per share. After deducting the underwriters' discount and other
offering expenses, the net proceeds to the Company were $49,288,000.

On June 21, 1996, the Company consummated an initial public offering of its
Common Stock. The Company sold 2,249,661 (including the underwriters'
over-allotment) shares of its Common Stock, no par value, at an initial public
offering price of $10.00 per share. After deducting the underwriters' discount
and other offering expenses, the net proceeds to the Company were $19,976,000.

On December 19, 1995, the Company's Board of Directors adopted, and on
January 3, 1996, the Company's shareholders approved the Employee Stock Purchase
Plan (Purchase Plan). The Purchase Plan allows eligible employees to purchase up
to 300,000 shares of common stock at the lower of 85% of the fair market value
of the stock on the first or last day of the applicable six month purchase
period. Eligible employees were able to participate in the Purchase Plan
beginning on October 1, 1996 through payroll withholding of up to $500 per pay
period. As of October 31, 1997 and 1996, employee withholdings included in
accrued expenses were $42,000 and $10,000, respectively. During fiscal 1997,
13,829 shares of Common Stock were issued under the Purchase Plan. No shares
were issued under the Purchase Plan as of October 31, 1996.

10. STOCK OPTIONS:

The Company has a stock option plan (the 1992 Plan) whereby 409,163 common
shares were issued to key management personnel, directors and consultants at
exercise prices not less than fair market value. The options have vesting terms
set by the Executive Compensation and Stock Option Committee of the Board of
Directors and expire 10 years after the date of grant.

F-15
<PAGE>

On December 19,1995, the Company's Board of Directors adopted, and on
January 3, 1996, the Company's shareholders approved, the 1995 Incentive Plan
(Incentive Plan) and the Non-Employee Directors' Stock Option Plan (Directors'
Plan). The Incentive Plan and the Directors' Plan authorized the granting of up
to 1,000,000 shares of Common Stock or options to purchase Common Stock to
Company employees and up to 150,000 options to purchase Common Stock to
non-employee directors, respectively. The Company will not grant any additional
options under the 1992 Plan.

The following table summarizes stock option activity:

Weighted
Range of Average
Exercise Exercise
Number of Prices Per Price Per
Shares Share Share
------ ----- -----
Options outstanding at
October 31, 1994............... 399,163 $ 0.24-$7.52 $2.73

Granted ..................... 207,087 7.52 7.52
---------
Options outstanding at
October 31, 1995............... 606,250 0.24-7.52 4.36

Granted ..................... 139,905 7.52-10.75 8.30
Canceled .................... (832) 7.52 7.52
---------
Options outstanding at
October 31, 1996............... 745,323 0.24-10.75 5.10

Granted ..................... 401,600 18.25-38.625 21.01
Exercised ................... (96,335) 2.41-18.25 5.66
Canceled .................... (11,480) 7.52-18.25 9.18
---------
Options outstanding at
October 31, 1997............... 1,039,108 $0.24-$38.625 $11.14
=========

F-16
<PAGE>

The following table summarizes information regarding stock options
outstanding at October 31, 1997:

Options Outstanding Options Exercisable
---------------------------------------- ----------------------
Weighted Weighted
Average Average
Number Remaining Exercise Number Weighted
Range of Outstanding Contractual Price Exercisable Average
Exercise at October Life in Per at October Exercise
Prices 31, 1997 Years Share 31, 1997 Price
------ -------- ----- ----- -------- -----

$ 0.24 3,327 4.2 $ 0.24 3,327 $ 0.24
$ 2.41 330,053 5.1 $ 2.41 326,312 $ 2.41
$ 7.52 232,678 7.9 $ 7.52 132,787 $ 7.52
$ 9.00-$10.75 73,250 8.9 $ 9.18 17,131 $ 9.26
$ 18.25 313,400 9.2 $18.25 44,700 $18.25
$ 20.19-$28.00 28,000 9.7 $24.18 -- --
$ 30.00-$34.31 12,800 9.6 $31.69 250 $31.38
$ 36.13-$38.63 45,600 9.7 $36.29 -- --

As of October 31, 1997, there were 636,766 stock options available for
grant under the Company's stock option plans.

The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" and the related interpretations in accounting for
its stock option plans. The disclosure requirements of Statement of Financial
Accounting Standards No. 123 "Accounting for Stock Based Compensation" (SFAS No.
123) were adopted by the Company in fiscal 1997. Had compensation cost for
options granted during fiscal 1997 and 1996 under the stock option plans, as
well as the Common Stock issued under the Purchase Plan (see Note 9), been
determined based upon the fair value of the options and Common Stock at the date
of grant, as prescribed by SFAS No. 123, the Company's pro forma net income and
pro forma net income per share would have been reduced to the following amounts:

YEAR ENDED OCTOBER 31,
-----------------------------
1997 1996
---- ----
Net income .................. $6,222,000 $2,960,000
Pro forma net income ........ 5,369,000 2,843,000
Net income per share ........ .80 .61
Pro forma net income per
share ..................... .69 .59

The weighted average fair value of each stock option granted during the
years ended October 31, 1997 and 1996 was $13.36 and $4.65, respectively. As of
October 31, 1997, the weighted average remaining contractual life of each stock
option outstanding was 7.4 years. The weighted average remaining contractual
life of each stock option granted during the years ended October 31, 1997 and
1996 was 9.6 and 8.9 years, respectively. The fair value of each option grant is
estimated on the date of grant using the Black - Scholes option pricing model
with the following weighted average assumptions:

F-17
<PAGE>

Year Ended October 31,
--------------------------
1997 1996
---- ----

Risk - free interest rate ....................... 6.26% 5.98%

Expected dividend yield ......................... -- --

Expected life ................................... 5.5 years 5.5 years

Expected volatility ............................. 53% 53%

Because additional option grants are expected to be made each year, the
above pro forma disclosures are not representative of pro forma effects of
reported net income for future years.

In fiscal 1997, the Company granted 56,000 stock options to an employee and
certain consultants for which the Company has recorded deferred compensation
based upon the difference between the deemed value for accounting purposes of
the Company's Common Stock and the exercise price per share on the date of
option grant. The deferred compensation balance will be amortized as
compensation expense over the option vesting periods which range from 1 to 4
years.

11. EMPLOYEE BENEFIT PLANS:

The Company has a defined contribution retirement plan for the benefit of
eligible employees. Management believes that the plan qualifies under Section
401(k) of the Internal Revenue Code. The plan provides for matching
contributions by the Company at a discretionary percentage of eligible pre-tax
contributions by the employee. Matching contributions by the Company were
$226,000, $107,000 and $68,000 for the years ended October 31, 1997, 1996 and
1995, respectively.

In fiscal 1995, the Company established a profit-sharing plan for the
benefit of eligible employees. The plan provides for a target contribution of
approximately 2% of total planned salaries and wages, with actual payments based
upon the achievement of certain of annual performance results. The Company
recorded profit sharing expense of $175,000, $150,000 and $65,000 for the years
ended October 31, 1997, 1996 and 1995, respectively.

12. OTHER RELATED PARTY TRANSACTIONS:

The Company recorded commission expense in fiscal 1997, 1996 and 1995 of
$3,948,000, $2,444,000 and $282,000, respectively, which related to commissions
payable to a distributor who is also a shareholder of the Company. Commissions
payable to this distributor included in accrued expenses as of October 31, 1997
and 1996 were $2,586,000 and $959,000, respectively. The distributor is
controlled by an individual who is a director of the Company. The Company also
recorded net sales in fiscal 1997 of $6,760,000 to a semiconductor company
controlled by a director of the Company.

F-18
<PAGE>

13. INCOME TAXES:

The components of income before income taxes are as follows:

Year Ended October 31,
-------------------------------------------
1997 1996 1995
---- ---- ----
Domestic ................. $7,729,000 $4,363,000 $2,105,000
Foreign .................. 1,159,000 122,000 --
---------- ---------- ----------
$8,888,000 $4,485,000 $2,105,000
========== ========== ==========

The components of the income tax provision are as follows:

Year Ended October 31,
---------------------------------------
1997 1996 1995
---- ---- ----
Current:
Federal.......................... $2,936,000 $1,451,000 $937,000
Foreign ......................... 412,000 42,000 --
State............................ 75,000 73,000 17,000
---------- ---------- --------
3,423,000 1,566,000 954,000
---------- ---------- --------

Federal.......................... (732,000) (12,000) (244,000)
Foreign ......................... -- -- --
State............................ (25,000) (29,000) (7,000)
---------- ---------- --------
(757,000) (41,000) (251,000)
---------- ---------- --------
$2,666,000 $1,525,000 $703,000
========== ========== ========

Income tax expense differs from the amount currently payable because
certain expenses, primarily depreciation and accruals, are reported in different
periods for financial reporting and income tax purposes.

The federal statutory income tax rate is reconciled to the effective income
tax rate as follows:

Year Ended October 31,
--------------------------
1997 1996 1995
---- ---- ----
Federal statutory rate ....................... 34.0% 34.0% 34.0%
State income taxes, net of
federal benefit ............................ 0.4 0.6 0.5
Foreign and U.S. tax effects attributable
to Foreign operations ...................... (4.9) (1.3) (1.0)
Research and development credit .............. (0.3) (0.2) (1.4)
Other ........................................ 0.8 0.9 1.3
----- ----- -----
30.0% 34.0% 33.4%
===== ===== =====

F-19
<PAGE>

The components of the net current and long-term deferred tax assets and
liabilities, measured under SFAS No. 109, are as follows:

October 31,
-----------------------------
1997 1996
----------- -----------
Deferred tax assets-
Inventories.......................... $ 92,000 $103,000
Warranty and installation accrual.... 683,000 342,000
Other................................ 596,000 196,000
---------- --------
1,371,000 641,000
Deferred tax liability-
Depreciation......................... (119,000) (146,000)
---------- --------
Net deferred tax asset.......... $1,252,000 $495,000
========== ========

14. CUSTOMER AND GEOGRAPHIC INFORMATION:

The Company's operations are conducted in one business segment. Export net
sales were $49,019,000, $27,789,000 and $12,102,000 in fiscal 1997, 1996 and
1995, respectively. Export net sales to Europe and East Asia were $13,427,000
and $35,592,000 in fiscal 1997, $13,140,000 and $14,649,000 in fiscal 1996 and
$10,099,000 and $2,003,000 in fiscal 1995, respectively.

The following table summarizes significant customers with net sales in
excess of 10% of net sales:

Year Ended October 31,
---------------------------------------
CUSTOMER 1997 1996 1995
-------- ----------- ----------- ----------

A .......................... $16,100,000 $12,828,000 $ *

B .......................... 8,534,000 * 2,490,000

C .......................... * 11,149,000 5,287,000

D .......................... * 8,361,000 *

E .......................... * 4,762,000 *

F .......................... * * 3,075,000

G .......................... * * 4,041,000

- ----------

* Net sales less than 10% of net sales

F-20
<PAGE>

15. SUPPLIER CONCENTRATION:

The Company relies to a substantial extent on outside vendors to
manufacture and supply many of the components and subassemblies used in the
Company's systems. Certain of these are obtained from a sole supplier or a
limited group of suppliers, many of which are small, independent companies.
Moreover, the Company believes that certain of these components and
subassemblies can only be obtained from its current suppliers. The Company's
reliance on outside vendors generally, and on sole suppliers in particular,
involves several risks, including a potential inability to obtain an adequate
supply of required components and reduced control over pricing, timely delivery
and quality of components.

16. COMMITMENTS AND CONTINGENCIES:

In fiscal 1995, the Company entered into a non-cancelable lease with an
expiration date in November 2000 and annual rental payments of $548,000 per year
for office facilities.

In fiscal 1997, the Company entered into a non-cancelable agreement to
lease a 60,000 square foot production facility and an 80,000 square foot office
facility to be built for the Company in Exton, Pennsylvania. The operating lease
has an initial term of 20 years and minimum annual rental payments of $1,482,250
for each year of the initial term. Options to extend the term of the lease for a
total of 9.5 additional years at minimum annual rental payments of not more than
$1,518,037 and a subsequent additional 5.5 years at fair market value are
included in the lease. Occupancy will be late in fiscal 1998, at which time the
monthly rentals begin.

Future minimum rental payments as of October 31, 1997 on these leases are
as follows:

FISCAL YEAR
-----------

1998 ............................ $ 938,000
1999 ............................ 2,030,000
2000 ............................ 2,030,000
2001 ............................ 1,528,000
2002 ............................ 1,482,000
Thereafter ...................... 23,519,000

Historically a significant portion of the Company's sales have been from
customers outside of the United States, including East Asia. Recently, the
currencies and economies of certain Asian countries came under pressure, some of
these Asian countries subsequently experienced currency devaluation, received
external support and agreed to certain economic reorganization programs
anticipated to reduce growth and credit demand. Management believes that the
recent economic events in Asian countries will not impact the Company's
financial position or results of operations as of October 31, 1997.

F-21
<PAGE>

The Company has asserted certain of its patent rights against two
defendants and is the defendant in another matter seeking a declaratory judgment
of patent noninfringement and invalidity, each matter pertaining to U.S. Letters
Patent No. 4,911,761. The United States District Court for the District of
Delaware granted a summary judgment in one matter wherein the Company is the
plaintiff and the Company has filed for reargument. On December 12, 1997 a jury,
following trial in the United States District Court for the District of
Delaware, found the subject patent valid and enforceable on all asserted claims
and found the defendant to have willfully infringed on all asserted claims. Some
of the claims in the matter seeking declaratory judgment have been dismissed for
lack of jurisdiction, a finding which is under appeal. Although management
believes that the ultimate resolution of these matters will not have a material
negative impact on the Company's financial position or results of operations,
there can be no assurance in that regard.

F-22

<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

CFM Technologies, Inc.

By: /s/ ROGER A. CAROLIN
------------------------------------------
Roger A. Carolin
President and Chief Executive Officer

Pursuant to the requirements of the Securities Act of 1934, this report has
been signed by the following persons on behalf of the registrant and in the
capacities and on the date indicated.

SIGNATURE TITLE DATE
--------- ----- ----

/S/ CHRISTOPHER F. MCCONNELL Chairman of the Board January 27, 1998
- ----------------------------- of Directors

/S/ ROGER A. CAROLIN President, Chief Executive January 27, 1998
- ----------------------------- Officer and Director
(Principal Executive
Officer)

/S/ LORIN J. RANDALL Vice President, Chief January 27, 1998
- ----------------------------- Financial Officer,
Treasurer and Secretary
(Principal Financial
Officer and Principal
Accounting Officer)

/S/ JAMES KIM Director January 27, 1998
- -----------------------------

/S/ BRAD MATTSON Director January 27, 1998
- -----------------------------

/S/ BURTON E. MCGILLIVRAY Director January 27, 1998
- -----------------------------

/S/ MILTON S. STEARNS, JR. Director January 27, 1998
- -----------------------------

F-23
<PAGE>

EXHIBIT INDEX

EXHIBIT
NUMBER DESCRIPTION
- ------ -----------

3.1 Articles of Incorporation of CFM Technologies, Inc., as amended*

3.1.1 Amendment to Articles of Incorporation.**

3.2 By-Laws of CFM Technologies, Inc.*

4.1 Form of Common Stock Certificate.*

4.2 Statement with Respect to Shares filed with the Pennsylvania Department
of State on May 1, 1997.

10.1 Employment Agreement dated as of January 9, 1995 by and between CFM
Technologies, Inc. and Lorin Jeffry Randall.*

10.2 Stock Option Agreement dated March 18, 1991 between CFM Technologies,
Inc. and Burton McGillivray, as extended and amended on June 11,1993 and
as amended on September 25, 1994.*

10.3 Stock Option Agreement dated as of December 9,1994 by and between CFM
Technologies,Inc. and Milton Stearns, as amended on November 3, 1995.*

10.4 CFM Technologies, Inc. Annual Profit Sharing Plan.*

10.4.1 Amendment to CFM Technologies, Inc. Annual Profit Sharing Plan.***

10.5 CFM Technologies, Inc. 1992 Employee Stock Option Plan.*

10.6 Amended and Restated CFM Technologies, Inc. 1995 Incentive Plan.****

10.7 Amended and Restated CFM Technologies, Inc. Non-Employee Directors'
Stock Option Plan.****

10.8 CFM Technologies, Inc. Employee Stock Purchase Plan.*

10.9 Rights Agreement dated as of April 24, 1997 between CFM Technologies,
Inc. and American Stock Transfer and Trust Co., as Rights Agent.*****

10.11 Distributor Agreement dated March 3, 1992 by and between Innotech
Corporation and CFM Technologies, Inc., as modified on June 15,1994.*

E-1
<PAGE>