The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the related notes included in Item 1, "Condensed Financial Statement" in this quarterly report on Form 10-Q and our consolidated financial statements and related notes included in Item 8, "Financial Statements and Supplementary Data" in our Annual Report on Form 10-K for the fiscal year ended September 30, 2008, as amended.

Cautionary Statement Regarding Forward-Looking Statements

The statements in this report include forward-looking statements. These forward-looking statements are based on our management's current expectations and beliefs and involve numerous risks and uncertainties that could cause actual results to differ materially from expectations. You should not rely upon these forward-looking statements as predictions of future events because we cannot assure you that the events or circumstances reflected in these statements will be achieved or will occur. You can identify forward-looking statements by the use of forward-looking terminology, including the words "believes," "expects," "may," "will," "should," "seeks," "intends," "plans," "estimates" or "anticipates" or the negative of these words and phrases or other variations of these words and phrases or comparable terminology. These forward-looking statements relate to, among other things: our sales, results of operations and anticipated cash flows; capital expenditures; depreciation and amortization expenses; research and development expenses; selling, general and administrative expenses; the development and timing of the introduction of new products and technologies; our ability to maintain and develop relationships with our existing and potential future customers and our ability to maintain the level of investment in research and development and capacity that is required to remain competitive. Many factors could cause our actual results to differ materially from those projected in these forward-looking statements, including, but not limited to: whether we will be able to complete acquisitions and integrate such businesses successfully and achieve anticipated synergies; variability of our revenues and financial performance; risks associated with product development and technological changes; the acceptance of our products in the marketplace by existing and potential future customers; disruption of operations or increases in expenses caused by civil or political unrest or other catastrophic events; general economic conditions and conditions in the semiconductor and solar industries in particular; the continued employment of our key personnel and risks associated with competition.

For a discussion of the factors that could cause actual results to differ materially from the forward-looking statements, see the "Risk Factors" set forth in Item 1A of Part I of Amtech Systems, Inc.'s Annual Report on Form 10-K for the fiscal year ended September 30, 2008, the "Liquidity and Capital Resources" section under "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this item of this report and the other risks and uncertainties that are set forth elsewhere in this report or detailed in our other Securities and Exchange Commission reports and filings. We assume no obligation to update these forward-looking statements.

Introduction

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

º Overview

º Results of Operations

º Liquidity and Capital Resources

º Off - Balance Sheet Arrangements

º Contractual Obligations

º Critical Accounting Policies

º Impact of Recently Issued Accounting Pronouncements

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

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

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

Due to the nature of the capital equipment markets that we serve, revenues, gross margins, and operating results have historically fluctuated on a quarterly basis. Our contracts include holdbacks of 10-20% of revenue, which are recognized at the time of customer acceptance.

Results of Operations

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

                                            Three Months Ended
                                        December 31,   December 31,
                                            2008           2007
Net revenue                                     100%           100%
Cost of goods sold                               66%            70%
Gross margin                                     34%            30%
Operating expenses:
   Selling, general and administrative           25%            28%
   Research and Development                       1%             2%
Total operating expenses                         26%            30%
Income from operations                            8%             0%
Interest income (expense), net                    0%             2%
Income before income taxes                        8%             2%
Income taxes                                      3%             1%
Net Income                                        5%             1%

Net Revenue

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

                                                   Three Months Ended
                                              December 31,     December 31,      Increase
                                                  2008             2007         (Decrease)       %
Segment                                          (dollars in thousands)
Solar and Semiconductor Equipment Segment    $       16,132   $        9,997   $    6,135      61 %
Polishing Supplies Segment                            1,740            1,744           (4 )    (0 %)
   Total Net Revenue                         $       17,872   $       11,741   $    6,131      52 %

Net revenue for the quarter ended December 31, 2008 increased by $6.1 million, or 52%, from the quarter ended December 31, 2007. Revenue increases in the solar and semiconductor equipment segment resulted from higher shipment volumes to the solar industry, partially offset by an increase in deferred revenue. Net revenue from the solar market was $11.1 million for the three months ended December 31, 2008, a $5.9 million or 113% increase from the three months ended December 31, 2007. Net revenue of the polishing supplies segment for the three months ended December 31, 2008 remained at the same level as net revenue for the three months ended December 31, 2007. The recent global credit crisis and related downturn in the global economy has caused many of our customers to delay or suspend their capacity expansion plans, which has resulted in lower orders. In addition, some of our customers have and others may request delays in the shipment of their orders. As a result, future revenues from both the solar and semiconductor markets are likely to be negatively impacted.

Backlog and Orders

Our order backlog as of December 31, 2008 and 2007 was $42.4 million and $49.9 million, respectively. Our backlog as of December 31, 2008 includes approximately $35.8 million of orders from our solar industry customers compared to $42.2 million at December 31, 2007. New orders booked in our most recent quarter ended December 31, 2008 were $9.3 million compared to $37.0 million in the first quarter of fiscal 2008 and $17.6 million in the fourth quarter of fiscal 2008. The decrease in new orders and backlog is due primarily to the recent global credit crisis and related economic downturn. This has caused many of our customers to delay or suspend their capacity expansion plans. Total bookings for the next several quarters are expected to remain noticeably lower than prior year quarters as a result of the lingering global economic downturn.

The orders included in our backlog are generally credit approved customer purchase orders expected to ship within the next twelve months. Because our orders are typically subject to cancellation or delay by the customer, our backlog at any particular point in time is not necessarily representative of actual sales for succeeding periods, nor is backlog any assurance that we will realize profit from completing these orders. Our backlog also includes revenue deferred pursuant to our revenue recognition policy, derived from orders that have already been shipped, but which have not met the criteria for revenue recognition. Our backlog as of December 31, 2008 and 2007, respectively, include $1.1 million and $0.9 million of deferred revenue for which there is an equal amount of deferred costs, i.e. with no gross profit to be realized.

Gross Profit and Gross Margin

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

                                                   Three Months Ended
                                              December 31,     December 31,      Increase
                                                  2008             2007         (Decrease)        %
Segment                                          (dollars in thousands)
Solar and Semiconductor Equipment Segment    $        5,778   $        3,059   $    2,719       89 %
Polishing Supplies Segment                              308              501         (193 )    (39 %)
   Total Gross Profit                        $        6,086   $        3,560   $    2,526       71 %
      Gross Margin                                      34%              30%

For the three months ended December 31, 2008, gross profit in the solar and semiconductor equipment segment increased 89% versus the three months ended December 31, 2007. The increase was driven primarily by higher volumes and improved capacity utilization, including improvements at R2D, the company acquired in the first quarter of fiscal 2008. Improvements in gross profit were partially offset by a $0.8 million increase in deferred profit during the three months ended December 31, 2008. In the comparable period ended December 31, 2007, deferred profit decreased $0.8 million. Gross margins in the polishing supplies segment were negatively impacted by product mix as volumes of higher-margin insert carriers decreased while sales of polishing machines, which generally carry a lower gross margin, increased.

Selling, General and Administrative

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

                                       18

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                                                   Three Months Ended
                                              December 31,     December 31,      Increase
                                                  2008             2007         (Decrease)       %
Segment                                          (dollars in thousands)
Solar and Semiconductor Equipment Segment    $        4,147   $        2,944   $    1,203      41 %
Polishing Supplies Segment                              336              358          (22 )    (6 %)
   Total SG&A                                $        4,483   $        3,302   $    1,181      36 %
     Percent of net revenue                             25%              28%

Total selling, general and administrative (SG&A) expense for the three months ended December 31, 2008 increased $1.2 million, or 36%, over the three months ended December 31, 2007. Commission expense increased $0.8 million for the three months ended December 31, 2008 versus the three months ended December 31, 2007 due to increased commissionable sales, primarily in the solar market. The remainder of the increase results from increases in stock-based and incentive compensation expense and professional fees, including costs related to compliance with the provisions of the Sarbanes-Oxley Act.

Research and Development

Research and development expenses consist of the cost of employees, consultants
and contractors who design, engineer and develop new products; materials and
supplies used in product prototyping.

                                                    Three Months Ended
                                              December 31,      December 31,      Increase
                                                  2008              2007         (Decrease)      %
Segment                                           (dollars in thousands)
Semiconductor and Solar Equipment Segment    $          224    $          233   $     (9 )     (4 %)
Polishing Supplies Segment                                -                 -          -        0 %
   Total Research and Development            $          224    $          233   $     (9 )     (4 %)
     Percent of net revenue                              1%                2%

Research and development costs for the three months ended December 31, 2008 remained consistent with the levels for the three months ended December 31, 2007.

Interest and other income (expense), net

Interest and other income (expense), net includes mainly interest income, interest expense and gains and losses on foreign currency transactions.

                                                                Three Months Ended
                                                         December 31,        December 31,         Increase
                                                             2008               2007             (Decrease)
Interest and other income (expense), net                      (dollars in thousands)
   Interest and other income (expense), net             $           51      $      207          $    (156 )
   Foreign currency gains (losses)                                  10             (54 )               64
   Total                                                $           61      $      153          $     (92 )

Interest income represents earnings on invested funds. Interest expense primarily consists of interest incurred on our overdraft facility, capital equipment borrowings and mortgage on Amtech's land and building in the Netherlands. Interest and other income decreased $0.2 million due to lower interest rates for the three months ended December 31, 2008.

Income Taxes

During the three months ended December 31, 2008, we recorded income taxes of $0.6 million. The effective tax rate used for calculating the income tax provision for the three months ended December 31, 2008 and December 31, 2007 were approximately 40% and 39%, respectively. The rates are estimates based upon projected annual income, estimated annual permanent differences and statutory tax rates in the various jurisdictions in which we operate.

At December 31, 2008 and September 30, 2008, cash and cash equivalents and restricted cash were $38.9 million and $38.5 million, respectively. Our working capital as of December 31, 2008 and September 30, 2008 was $58.2 million and $57.2 million, respectively. The increase in cash and cash equivalents resulted primarily from cash provided by operations, partially offset by purchases of property, plant and equipment as well as a payment for our licensing agreement with PST. In the first quarter of fiscal 2009 we terminated our line of credit in the amount of Euro 1.0 million (approximately $1.4 million). We believe that our principal sources of liquidity discussed above are sufficient to support operations.

The success of our growth strategy is dependent upon the availability of additional capital resources on terms satisfactory to management. Our sources of capital in the past have included capital leases, long-term debt and the sale of equity securities, which include common and preferred stock sold in private transactions and public offerings. There can be no assurance that we can raise such additional capital resources on satisfactory terms.

In December, the Board of Directors approved a stock repurchase program authorizing the repurchase of up to $4 million of its common stock. Under the program, shares may be repurchased from time to time in open market transactions at prevailing market prices or in privately negotiated purchases. The timing and actual number of shares purchased will depend on a variety of factors, such as price, corporate and regulatory requirements, alternative investment opportunities, and other market and economic conditions. Repurchases under the program will be funded from available working capital. The program may be commenced, suspended or terminated at any time, or from time-to-time at management's discretion without prior notice.

Cash Flows from Operating Activities

Cash provided by our operating activities was $1.1 million for the three months ended December 31, 2008, compared to $1.7 million used in such activities for the three months ended December 31, 2007. In the first quarter of fiscal 2009, cash was primarily generated by earnings from operations, partially offset by increases in inventory and prepaid expenses and other assets as well as decreases in accrued liabilities and customer deposits. In the first quarter of fiscal 2008, cash was primarily used to finance increases in inventory and decreases in accounts payable, other current liabilities and deferred profit. This was partially offset by a decrease in accounts receivable.

Cash Flows from Investing Activities

Our investing activities for the three months ended December 31, 2008 and 2007 used $0.5 million and $9.6 million respectively. For the three months ended December 31, 2008, we had capital expenditures of $0.2 million primarily for machinery and equipment and we made a payment of $0.3 million for our licensing agreement with PST. For three months ended December 31, 2007, we used cash of $8.0 million related to the acquisition of R2D. Capital expenditures in the same period were $1.2 million, primarily related to the improvements of our facilities in The Netherlands.

Cash Flows from Financing Activities

For the three months ended December 31, 2008, $0.1 million of cash was used in financing activities for the payment of long-term debt. This compares to cash of $33.6 million provided by the sale of 2,500,000 shares of common stock in an underwritten public offering at a price to the public of $14.41 per share in the first quarter of fiscal 2008. An additional $0.2 million was provided by the exercise of stock options in the first quarter of fiscal 2008.

Off-Balance Sheet Arrangements

As of December 31, 2008, Amtech had no off-balance sheet arrangements as defined in Item 303(a) (4) of Regulation S-K promulgated by the Securities and Exchange Commission.

Contractual Obligations

The only significant changes in contractual obligations since the end of fiscal 2008 have been purchase obligations (See Note 7 of the Condensed Consolidated Financial Statements). Refer to Amtech's annual report on Form 10-K for the year ended September 30, 2008, for information on the Company's other contractual obligations.

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

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

A critical accounting policy is one that is both important to the presentation of our financial position and results of operations, and requires management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. These uncertainties are discussed in "Item 1A. Risk Factors" of this Annual Report on Form 10-K for the year ended September 30, 2008. We believe the following critical accounting policies affect the more significant judgments and estimates used in the preparation of our consolidated financial statements.

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

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

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

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

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

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

Deferred Tax Asset Valuation Allowance. We currently have significant deferred tax assets resulting from expenses not currently deductible for tax purposes, revenue recognized for tax purposes but deferred for financial statement purposes and net operating loss carryforwards in certain state and foreign jurisdictions available to reduce taxable income in future periods.

During fiscal 2004, we recorded a valuation allowance for the total of our deferred tax assets. SFAS No. 109 requires a valuation allowance be established when it is "more likely than not" that all or a portion of deferred tax assets will not be realized. Since 2004, we have sustained increasing profitability and utilized all of our federal net operating loss carry forwards. Each quarter, we analyze each deferred tax asset to determine the amount that is more likely than not to be realized, based upon the weight of available evidence, and adjust the valuation allowance to the amount of deferred taxes that do not meet the criteria for recognition under SFAS No. 109. Currently, we only maintain a . . .