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RESEARCH AND DEVELOPMENT The market for semiconductor capital equipment is characterized by rapid technological change. The Company believes that continued and timely development of new products and enhancements to existing products are necessary for it to maintain its competitive position. Accordingly, the Company devotes a significant portion of its personnel and financial resources to R&D programs and seeks to maintain close relationships with its customers to be responsive to their product needs. The Company's net R&D expenses during fiscal 1998, 1997 and 1996, were approximately $206.5 million, $192.3 million, and $186.9 million, respectively, and represented 19.6%, 17.9% and 14.1% of total revenue, respectively. Such R&D expenses were net of third party funding from industry consortiums and customers, representing approximately $1.2 million and $3.4 million, during fiscal 1997 and 1996, respectively. Such expenditures were used for the development of new products and film applications, and the continued enhancement of existing products. Current projects include the development of advanced etch and CMP products. As of fiscal 1998, the R&D projects funded, in whole or in part, by the United States Display Consortium (\"USDC\") were in large part complete. In June 1994, the Company received a multi-year contract from the USDC for the development of a FPD etch system, based on the Company's Transformer Coupled Plasma technology. The Continuum etch system was designed for use in the manufacture of large scale FPDs for several new technologies, including active matrix liquid crystal displays and field emission displays. Included in the $1.2 million and $3.4 million of third party funded R&D for fiscal 1997, and 1996, was $1.2 million and $3.2 million, respectively, from the USDC. The Company expects to continue to make substantial investments in R&D. 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