Certain statements in "Management's Discussion and Analysis of Financial Condition and Results of Operations" are forward-looking statements that involve risks and uncertainties. Words such as may, will, should, would, anticipates, expects, intends, plans, believes, seeks, estimates and similar expressions identify such forward-looking statements. The forward-looking statements contained herein are based on current expectations and entail various risks and uncertainties that could cause actual results to differ materially from those expressed in such forward-looking statements. Factors that might cause such a difference include, among other things, those set forth under or referred to in "Liquidity and Capital Resources" and "Risk Factors" and those appearing elsewhere in this Form 10-Q. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. We assume no obligation to update these forward-looking statements to reflect actual results or changes in factors or assumptions affecting forward-looking statements.

Overview

Axcelis Technologies, Inc. ("Axcelis," "we," "us," or "our"), is a producer of ion implantation and dry strip equipment used in the fabrication of semiconductors in the United States, Europe and Asia. In addition, we provide extensive aftermarket service and support, including spare parts, equipment upgrades, and maintenance services. We own 50% of the equity of a joint venture known as SEN Corporation, an SHI and Axcelis Company, or "SEN," with Sumitomo Heavy Industries, Ltd. ("SHI") in Japan. SEN licenses technology from us relating to the manufacture of specified ion implantation products and has exclusive rights to manufacture and sell these products in the territory of Japan. SEN is the leading producer of ion implantation equipment in Japan.

The semiconductor capital equipment industry is subject to significant cyclical swings in capital spending by semiconductor manufacturers. Capital spending is influenced by demand for semiconductors and the products using them, the utilization rate and capacity of existing semiconductor manufacturing facilities and changes in semiconductor technology, all of which are outside of our control. As a result, our revenues and gross margins, to the extent affected by increases or decreases in volume, could fluctuate from year to year and period to period. The industry experienced a downturn beginning in the second half of 2007, which has continued throughout 2008. Our gross margins are also affected by the introduction of new products. We typically become more efficient in manufacturing products as they mature. Our operating expense base is largely fixed and does not vary significantly with changes in volume. Therefore, we could experience fluctuations in operating results and cash flows depending on our revenues as driven by the level of capital expenditures by semiconductor manufacturers.

The sizable expense of building, upgrading or expanding a semiconductor fabrication facility is increasingly causing semiconductor companies to contract with foundries to manufacture their semiconductors. In addition, consolidation and partnering within the semiconductor manufacturing industry is increasing. We expect these trends to continue to reduce the number of our potential customers. This growing concentration of Axcelis' customers may increase competitive pricing as higher percentages of our total revenues are tied to the buying decisions of a particular customer or a small number of customers.

In the first three quarters of fiscal 2008, the last two quarters of fiscal 2007 and for the entire fiscal year 2007, we have incurred net losses. Beginning in 2004, most customers shifted from multi wafer tools to single wafer tools for high current ion implant applications. Because we did not have a single wafer high current product, we have experienced a significant loss of market share which we have yet to regain. Our reported net losses for the past several quarters are attributable to our loss of market share coupled with the industry downturn discussed previously. We introduced our single wafer Optima HD (for high current applications) product in 2006 and have begun to gain acceptance of this product at several customers. We believe that the Optima product line represents a viable offering to

our existing customer base that will allow us to regain market share when our customers begin to add production capacity and the overall market recovers. During the nine months ended September 30, 2008, we recognized revenue of approximately $18.1 million on sales of the Optima HD. As of September 30, 2008, total amounts included in inventory, other current assets and internal use assets related to our investment in the Optima product line approximated $111.4 million.

During September of, 2008, our stock price dropped significantly below book value. Investor concerns about our ability to repay outstanding debt in 2009 and our ability to generate sufficient cash flows to support ongoing operations have adversely impacted our stock price. In concert with the market uncertainty resulting from the current credit crisis, we believe that declining business and consumer confidence and increased unemployment have precipitated an economic slowdown and fears of a long recession. An economic downturn characterized by higher unemployment, lower family income, lower corporate earnings, lower business investment and lower consumer spending, has severely impacted many technology manufacturers and has significantly lowered the demand for our products. In concert with these factors, as mentioned above, we have lost significant market share in high current ion implant (the largest market segment in ion implant) over the past several years. We believe that we now have competitive products in the high current and high energy ion implant market segments, as well as in dry strip. However, challenging market conditions have severely limited our ability to increase sales and market share The Company believes that a combination of these factors accounts for the difference between our stock trading price and our book value.

Continuing capital market upheavals may have an adverse effect on us because we are dependent on customer behavior. Our revenues are likely to continue to decline in such circumstances and our profit margins will continue to erode. In addition, in the event of extreme prolonged events, such as the global credit crisis, we could incur significant losses. Factors such as consumer spending, business investment, and the volatility and strength of the capital markets all affect the business and economic environment, and, ultimately, the amount and profitability of our business. Continuing adverse trends in the economy are likely to affect our earnings negatively and to have a material adverse effect on our business, results of operations and financial condition.

Operating results for the periods presented are not necessarily indicative of the results that may be expected for subsequent interim periods or for the year as a whole.

Critical Accounting Estimates

Management's discussion and analysis of our financial condition and results of operations are based upon Axcelis' consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, income taxes, intangibles, accounts receivable, inventory and warranty obligations. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

The critical accounting estimates are those that we believe are the more significant judgments and estimates used in the preparation of our condensed consolidated financial statements. Our critical accounting estimates are described in our Management's Discussion and Analysis of Financial Condition and Results of Operations and in the Notes to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2007. For the third quarter of fiscal 2008, we believe that the following critical accounting estimates significantly affected our estimates and judgments in the preparation of our consolidated financial statements.

Inventory Valuation

At each balance sheet date, we evaluate our ending inventories for excess quantities and obsolescence. This evaluation includes analysis of sales levels by product and projections of future demand. These projections assist us in determining the carrying value of our inventory and are also used for near-term factory production planning. Generally, inventories on hand in excess of historical usage or forecasted demand are not valued. In addition, we write off inventories that are considered obsolete. Among other factors, management considers forecasted demand in relation to the inventory on hand, competitiveness of product offerings, market conditions and product life cycles when determining obsolescence and net realizable value We adjust remaining specific inventory balances to approximate the lower of our manufacturing cost or market value. If actual future demand or market conditions are less favorable than our projections as forecasted, additional inventory write-downs may be required and would be reflected in cost of sales in the period the revision is made. This would have a negative impact on our gross margin in that period. If in any period we are able to sell inventories that were not valued or that had been written off in a previous period, related revenues would be recorded without any offsetting charge to cost of sales, resulting in a net benefit to our gross margin in that period.

Goodwill

In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, we are required to review goodwill for impairment at least annually or more often if there are indicators of impairment present. Historically, we have performed our annual impairment analysis during the fourth quarter of each year. As a result of current economic conditions, coupled with our stock trading at a price below book value, we now perform our impairment test no less frequently than quarterly. The provisions of SFAS 142 require that a two-step impairment test be performed for goodwill. In the first step, we will compare the fair value of the reporting unit to which goodwill has been allocated to its carrying value. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is considered not impaired and we are not required to perform further testing. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then we must perform the second step of the impairment test and determine the implied fair value of the reporting unit's goodwill. If the carrying value of a reporting unit's goodwill exceeds its implied fair value, then we would record an impairment loss equal to the difference.

Determining the number of reporting units and the fair value of a reporting unit requires us to make judgments and involves the use of significant estimates and assumptions. These estimates and assumptions include revenue growth rates and operating margins used to calculate projected future cash flows, risk-adjusted discount rates, future economic and market conditions and determining appropriate market comparables. We believe these assumptions to be reasonable but actual conditions are unpredictable and inherently uncertain. Actual future results may differ from our estimates.

As discussed in Note 2 to the consolidated financial statements, during the quarter we conducted analyses of the potential impairment of goodwill and concluded that this asset was not impaired at September 30, 2008. We will continue to perform these analyses on a quarterly basis for the foreseeable future.

Impairment of Long-Lived Assets

We consider no less frequently than quarterly whether indicators of impairment of long-lived assets are present. These indicators may include, but are not limited to, significant decreases in the market value of an asset, significant changes in the extent or manner in which an asset is used and instances where our stock price trades at a price below our book value. If these or other indicators are present, we determine whether the estimated undiscounted cash flows attributable to the assets in question are less than their carrying value. If less, we would recognize an impairment loss based on the excess of the carrying amount of the assets over their respective fair values. Fair value is determined by discounted

future cash flows, appraisals or other methods. If the asset determined to be impaired is to be held and used, we recognize an impairment loss through a charge to our operating results which also reduces the carrying basis of the related asset(s). The new carrying value of the related asset(s) is depreciated over the remaining estimated useful life of the asset(s). We may incur impairment losses in future periods if factors influencing our estimates of the undiscounted cash flows change.

As discussed in Note 3 to the consolidated financial statements, during the quarter we conducted analyses of the potential impairment of long-lived assets and concluded that these assets were not impaired. We will continue to perform these analyses on a quarterly basis for the foreseeable future.

Results of Operations

    The following table sets forth our results of operations as a percentage of
revenue for the periods indicated:

                                             Three months ended            Nine months ended
                                                September 30,                September 30,
                                            2008            2007         2008            2007
Revenue
  Product                                      69.9 %          85.5 %       78.5 %          84.9 %
  Service                                      28.4            13.2         19.9            13.6
  Royalties, primarily from SEN                 1.7             1.3          1.6             1.5

                                              100.0           100.0        100.0           100.0
Cost of revenue
  Product                                      49.0            57.3         54.2            53.2
  Service                                      14.1             9.0         10.5             8.4

                                               63.1            66.3         64.7            61.6
Gross profit                                   36.9            33.7         35.3            38.4
Other costs and expenses
  Research and development                     34.2            17.1         23.9            17.2
  Sales and marketing                          26.6            11.5         17.7            12.2
  General and administrative                   22.7             9.6         15.0             9.8
  Impairment of goodwill                          -             4.3            -             1.5
  Amortization of intangible assets             1.4             0.6          0.9             0.6
  Restructuring                                 1.0               -          1.7               -

                                               85.9            43.1         59.2            41.3

Loss from operations                          (49.0 )          (9.4 )      (23.9 )          (2.9 )
Other income (expense)
  Equity income of SEN                         (2.1 )           1.7         (0.5 )           2.6
  Interest income                               0.7             1.1          0.7             1.2
  Interest expense                             (3.7 )          (1.5 )       (2.4 )          (1.5 )
  Other-net                                     1.6             0.2          0.1             0.2

                                               (3.5 )           1.5         (2.1 )           2.5

Loss before income taxes                      (52.5 )          (7.9 )      (26.0 )          (0.4 )
Income taxes (credits)                          0.8            (0.3 )        0.5            (0.2 )

Net loss                                      (53.3 )%         (7.6 )%     (26.5 )%         (0.2 )%

Three and nine months ended September 30, 2008 in comparison to the three and nine months ended September 30, 2007

Revenue

Product

Product revenue, which includes systems sales, sales of spare parts and product upgrades was $32.5 million, or 69.9% of revenue for the three months ended September 30, 2008, compared with $92.0 million, or 85.5% of revenue for the three months ended September 30, 2007. Product revenue was $163.5 million, or 78.5% of revenue for the nine months ended September 30, 2008, compared with $267.5 million, or 84.9% of revenue for the nine months ended September 30, 2007. Product revenue levels in 2007 and 2008 have been impacted by the Company's low level high current market share. The decline in product revenue in both the three and nine month periods ended September 30, 2008 is attributable to a weakening semiconductor market and a related decrease in capital spending by semiconductor manufacturers.

A portion of the Company's revenue from system sales is deferred until installation and other services related to future deliverables are performed. The total amount of deferred revenue at September 30, 2008 and 2007 was $18.4 million and $40.5 million, respectively.

Service

Service revenue, which includes the labor component of maintenance and service contracts and service hours provided by on-site service personnel, was $13.2 million, or 28.4% of revenue for the three months ended September 30, 2008, compared with $14.2 million, or 13.2% of revenue, for the three months ended September 30, 2007. Service revenue was $41.4 million, or 19.9% of revenue for the nine months ended September 30, 2008, compared with $42.8 million, or 13.6% of revenue, for the nine months ended September 30, 2007. Although service revenue generally increases with the expansion of the installed base of systems, it can fluctuate period to period based on capacity utilization at customers' manufacturing facilities, which affects the need for equipment service.

Ion Implant

The largest portion of the Company's product and service revenues are derived from ion implantation products and services, which typically average from 70% to 80% of total revenues. During the three months ended September 30, 2008, revenue from sales of ion implantation products and service accounted for $36.8 million, or 79.1% of total revenue, compared with $80.5 million, or 74.8%, of total revenue in the three months ended September 30, 2007. Revenue from sales of ion implantation products and service accounted for $170.6 million, or 81.9% of revenue in the nine months ended September 30, 2008, compared with $232.5 million, or 73.8% of revenue in the nine months ended September 30, 2007. The remainder of the Company's revenue derives from the sale of products and services relating to dry strip and other processing equipment.

Aftermarket

The Company's product revenues include sales of spare parts and product upgrades as well as complete systems. We refer to the business of selling spare parts and product upgrades, combined with the sale of maintenance labor and service contracts and service hours as the "aftermarket" business. The revenue from our aftermarket business was $36.8 million for the three month period ended September 30, 2008, compared to $43.2 million for the corresponding period of the preceding year. The revenue from our aftermarket business was $115.7 million for the nine month period ended September 30, 2008, compared to $128.8 million for nine month period ended September 30, 2007. Aftermarket revenue generally increases with expansion of the installed base of systems but can

fluctuate period to period based on capacity utilization at customers' manufacturing facilities which affects the sale of spare parts and demand for equipment service.

Royalties

Royalty revenue was $0.8 million, or 1.7% of revenue for the three months ended September 30, 2008, compared with $1.4 million, or 1.3% of revenue for the three months ended September 30, 2007. Royalty revenue for the nine months ended September 30, 2008 was $3.3 million, or 1.6% of revenue, compared to $4.9 million, or 1.5% of revenue for the nine months ended September 30, 2007. Royalties are primarily earned under the terms of our license agreement with SEN. Revenue changes are mainly attributable to fluctuations in SEN sales volume based on demand for equipment by Japanese semiconductor manufacturers and the timing of shipments in Japan.

Gross Profit

Product

Gross profit from product revenue was 30.0% for the three months ended September 30, 2008, compared to 33.1% for the three months ended September 30, 2007. The three percent decrease in gross profit from product revenues is attributable to the significantly lower systems sales volume during the current quarter, which was coupled with significant revenue deferrals creating close to break-even margins. These amounts were offset by the favorable impact of an increased mix of parts and upgrade revenue at much higher margins. Gross profit from product revenue was 31.0% for the nine months ended September 30, 2008, compared with 37.3% in the nine months ended September 30, 2007. The decrease in gross profit from product revenues for the nine month period is attributable to lower margins on new product revenue recognized and the impact of operating overheads on lower volumes (14.5% decrease from the prior year), offset by the favorable impact of an increased mix of parts and upgrade revenue at higher margins (8.2% increase from the prior year). Revenue recognized on new products generally carries lower margins than mature products due to higher initial material costs and labor inefficiencies.

Service

Gross profit from service revenue was 50.3% for the three months ended September 30, 2008, compared to 31.5% for the three months ended September 30, 2007. Gross profit from service revenue was 47.1% for the nine months ended September 30, 2008, compared to 38.3% for the nine months ended September 30, 2007. The increase in gross profit for both the three and nine month periods ended September 30, 2008, is attributable to service pricing increases enacted during the first quarter of 2008 driving a higher mix of profitable service support agreements and lower expenses against fixed price support contracts.

Research and Development

Research and development expense was $15.9 million in the three months ended September 30, 2008, a decrease of $2.4 million, or 13.1%, compared with $18.3 million in the three months ended September 30, 2007. The decrease was driven primarily by decreased professional fee expenses ($0.6 million), decreased payroll costs ($0.8 million) and decreased development material costs ($1.0 million). Research and development expense was $49.7 million in the nine months ended September 30, 2008, a decrease of $4.4 million, or 8.1%, compared with $54.1 million in the nine months ended September 30, 2007. The decrease was driven primarily by decreased professional fee expenses ($2.4 million), decreased payroll costs ($2.3 million) and decreased development material costs ($0.5 million), offset by development asset amortization and depreciation costs ($0.8 million). We

expect research and development spending to decline slightly throughout 2008 as development costs for new products drop off and are replaced by a lower level of spending for continuous improvement.

Research and development expense was attributable to the following activities through the third quarter of 2008: 47% for new product development, 35% for improvement of existing products, and 18% for product testing.

Sales and Marketing

Sales and Marketing expense was $12.4 million in the three months ended September 30, 2008, which is flat as compared with $12.4 million in the three months ended September 30, 2007. The activity from quarter to quarter related primarily to decreased payroll and related costs ($1.0 million), decreased marketing costs ($0.2 million) and decreased commissions ($0.2 million), offset by increased evaluation system costs ($1.4 million). Selling expense was $36.8 million in the nine months ended September 30, 2008, a decrease of $1.7 million, or 4.5%, compared with $38.5 million in the nine months ended September 30, 2007. The decrease was driven primarily by decreased travel costs ($0.7 million), decreased separation costs ($0.6 million), decreased payroll costs ($1.2 million), and decreased commissions and bonuses expenses ($0.6 million), offset partially by increased evaluation system costs ($1.4 million).

General and Administrative

General and administrative expense was $10.6 million in the three months ended September 30, 2008, an increase of $0.2 million, or 1.9%, compared with $10.4 million in the three months ended September 30, 2007. The increase was driven primarily by increased legal fee expenses ($0.5 million), offset by decreased separation costs ($0.2 million) and decreased travel costs ($0.1 million). General and administrative expense was $31.3 million in the nine months ended September 30, 2008, an increase of $0.2 million, or 0.6%, compared with $31.1 million in the nine months ended September 30, 2007. Increased legal and professional fee expenses ($1.7 million) were offset by decreased payroll related costs ($0.8 million), decreased lease, travel, utilities, sales tax and insurance expense ($0.5 million), and lower depreciation expense ($0.2 million).

Restructuring Charges

In May 2008, the Company implemented a reduction in force as part of planned actions taken by management to control costs to provide future profitability and conserve cash. This reduction in force resulted in a total charge to expense of approximately $3.7 million principally for separation and outplacement costs, of which $3.4 million has been recognized as expense through September 30, 2008. The remaining $0.3 million is expected to be recognized in the fourth quarter of 2008. A total of $3.4 million has been paid through September 30, 2008. Substantially all payments related to these actions are expected to be completed in 2008.

In October 2007, the Company implemented a reduction in force as part of management's efforts to control costs. This reduction in force resulted in a total charge to expense of approximately $2.6 million related to separation and outplacement costs, of which $2.5 million was recorded in 2007 and $0.1 million was recorded in the period ended March 31, 2008. A total of $2.4 million has . . .