<PAGE>   1

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

                                  FORM 10-Q

(Mark One)

[X]   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
      EXCHANGE ACT OF 1934

for the quarterly period ended                MAY 29, 1999
                                    --------------------------------------------

                                                    or

[ ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
      EXCHANGE ACT OF 1934


For the transition period from                         to
                               ---------------------        --------------------
Commission File Number:                              0-17276
                         -------------------------------------------------------


                             FSI INTERNATIONAL, INC.
--------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)


         MINNESOTA                                      41-1223238
--------------------------------------------------------------------------------
(State or other jurisdiction of            (I.R.S. Employer Identification No.)
 incorporation or organization)


 322 LAKE HAZELTINE DRIVE, CHASKA, MINNESOTA                55318
--------------------------------------------------------------------------------
(Address of principal executive offices)                   (Zip Code)

                                  612-448-5440
--------------------------------------------------------------------------------
              (Registrant's telephone number, including area code)

--------------------------------------------------------------------------------
        (Former name, former address and former fiscal year, if changed
                               since last report)

Indicate by check mark whether the registrant (1) has filed all reports required
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.
                                    |X| YES | | NO

Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practical date:

COMMON STOCK, NO PAR VALUE - 23,282,009 SHARES OUTSTANDING AS OF JUNE 30, 1999



                                       1
<PAGE>   2

                    FSI INTERNATIONAL, INC. AND SUBSIDIARIES

                          QUARTERLY REPORT ON FORM 10-Q
<TABLE>
<CAPTION>

PART I.                  FINANCIAL INFORMATION                                                                    PAGE NO.
-------                  ---------------------                                                                    --------
<S>                      <C>                                                                                      <C>
Item 1.                  Consolidated Condensed Financial Statements:

                              Consolidated Condensed Balance Sheets (Unaudited) as of
                              May 29, 1999 and August 29, 1998                                                         3

                              Consolidated Condensed Statements of Operations
                              (Unaudited) for the quarters ended May 29, 1999 and May 30, 1998                         5

                              Consolidated Condensed Statements of Operations (Unaudited)
                              for the nine months ended May 29, 1999 and May 30, 1998                                  6

                              Consolidated Condensed Statements of Cash Flows (Unaudited)
                              for the nine months ended May 29, 1999 and May 30, 1998                                  7

                              Notes to Consolidated Condensed Financial Statements (Unaudited)                         8

Item 2.                  Management's Discussion and Analysis of Financial Condition and
                         Results of Operations                                                                        11

Item 3.                  Quantitative and Qualitative Disclosures About Market Risk                                   24

PART II.                 OTHER INFORMATION
--------                 -----------------

Item 1.                  Legal Proceedings                                                                            25

Item 2.                  Change in Securities                                                                         26

Item 6.                  Exhibits and Reports on Form 8-K.                                                            27

                         Signature                                                                                    29

</TABLE>


                                       2
<PAGE>   3
                    PART I. Item 1. FINANCIAL INFORMATION

                  FSI INTERNATIONAL, INC. AND SUBSIDIARIES
                    CONSOLIDATED CONDENSED BALANCE SHEETS
                      MAY 29, 1999 AND AUGUST 29, 1998

                                   ASSETS
                                 (Unaudited)
<TABLE>
<CAPTION>
                                                                                    May 29,              August 29,
                                                                                      1999                  1998
                                                                                -----------------      ---------------
<S>                                                                             <C>                  <C>
Current assets:

      Cash and cash equivalents                                                 $    47,441,599      $    72,789,811
      Marketable securities                                                          32,336,566           13,495,411
      Trade accounts receivable, net of allowance for
           doubtful accounts of $1,850,000 and $2,390,000,
           respectively                                                              23,611,534           23,202,801
      Trade accounts receivable from affiliates                                       4,528,488            8,705,425
      Inventories                                                                    36,232,266           41,488,206
      Deferred income tax benefit                                                    10,101,953           12,918,113
      Refundable income taxes                                                                 -            9,769,314
      Prepaid expenses and other current assets                                       5,105,116            5,309,084
      Net assets of discontinued operations                                          13,104,433           17,403,728
                                                                                ---------------      ---------------

           Total current assets                                                     172,461,955          205,081,893
                                                                                ---------------      ---------------

Property, plant and equipment, at cost                                              111,587,875          106,938,716
      Less accumulated depreciation and amortization                                (47,251,267)         (40,799,980)
                                                                                ---------------      ---------------
                                                                                     64,336,608           66,138,736

Investment in affiliates                                                             13,615,129           15,408,400
Deposits and other assets                                                             4,382,518            3,440,044
Deferred income tax benefit                                                                   -            4,296,462
                                                                                ---------------      ---------------

                                                                                $   254,796,210      $   294,365,535
                                                                                ===============      ===============
</TABLE>

     See accompanying notes to consolidated condensed financial statements.


                                       3
<PAGE>   4

                    FSI INTERNATIONAL, INC. AND SUBSIDIARIES
                      CONSOLIDATED CONDENSED BALANCE SHEETS
                        MAY 29, 1999 AND AUGUST 29, 1998
                                   (continued)

                      LIABILITIES AND STOCKHOLDERS' EQUITY
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                    May 29,             August 29,
                                                                                      1999                 1998
                                                                                -----------------    -----------------
<S>                                                                              <C>                <C>
Current liabilities:

      Current maturities of long-term debt                                       $        59,696    $          65,418
      Trade accounts payable                                                          18,891,291           15,884,218
      Accrued expenses                                                                18,375,713           20,367,735
      Customer deposits                                                                  834,789                    -
      Deferred revenue                                                                 3,439,156           11,607,401
                                                                                 ---------------    -----------------

            Total current liabilities                                                 41,600,645           47,924,772
                                                                                 ---------------    -----------------

Long-term debt, less current maturities                                               42,015,060           42,064,496

Stockholders' equity:
      Preferred stock, no par value; 9,700,000 shares
            authorized; none issued and outstanding                                            -                    -
      Series A Junior Participating Preferred Stock, no par value; 300,000
            shares authorized; none issued
            and outstanding                                                                    -                    -
      Common stock, no par value; 50,000,000 shares
            authorized; issued and outstanding, 23,269,319
            and  23,034,562 shares at May 29, 1999
            and August 29, 1998, respectively                                        164,967,661          163,307,107
      Retained earnings                                                                7,509,882           43,033,192
      Cumulative translation adjustment                                               (1,297,038)          (1,964,032)
                                                                                 ---------------    -----------------

            Total stockholders' equity                                               171,180,505          204,376,267
                                                                                 ---------------    -----------------

                                                                                 $   254,796,210    $     294,365,535
                                                                                 ===============    =================
</TABLE>



     See accompanying notes to consolidated condensed financial statements.

                                       4

<PAGE>   5
                    FSI INTERNATIONAL, INC. AND SUBSIDIARIES
                 CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
              FOR THE QUARTERS ENDED MAY 29, 1999 AND MAY 30, 1998
                                   (Unaudited)
<TABLE>
<CAPTION>

                                                                                   May 29,            May 30,
                                                                                     1999               1998
                                                                                     ----               ----
<S>                                                                             <C>                <C>
Sales (including sales to affiliates of
      $7,545,000 and $14,352,000, respectively)                                 $   37,673,719     $   39,322,137
Cost of goods sold                                                                  27,107,950         22,844,922
                                                                                --------------     --------------
      Gross profit                                                                  10,565,769         16,477,215

Selling, general and administrative expenses                                         8,503,531         12,153,359
Research and development expenses                                                    7,388,035          8,868,779
                                                                                --------------     --------------
      Operating loss                                                                (5,325,797)        (4,544,923)

Interest expense                                                                      (716,382)          (787,742)
Interest income                                                                      1,139,947          1,182,358
Other income (expense), net                                                             24,650             23,539
                                                                                --------------     --------------
      Loss before income taxes                                                      (4,877,582)        (4,126,768)

Income tax expense (benefit)                                                        14,784,916         (1,401,901)
                                                                                --------------     --------------

      Loss before equity in (loss) earnings of affiliates                          (19,662,498)        (2,724,867)

Equity in (loss) earnings of affiliates                                               (876,473)           144,047
                                                                                --------------     --------------

      Net loss from continuing operations                                          (20,538,971)        (2,580,820)

Discontinued operations:
      Income from operations                                                           152,135            594,274
                                                                                --------------     --------------

      Net loss                                                                   $ (20,386,836)     $  (1,986,546)
                                                                                ==============     ==============

Net income (loss) per common share - basic:
      Continuing operations                                                      $       (0.88)     $       (0.11)
      Discontinued operations                                                    $        0.00      $        0.02
      Net loss                                                                   $       (0.88)     $       (0.09)

Net income (loss) per common share - diluted:
      Continuing operations                                                      $       (0.88)     $       (0.11)
      Discontinued operations                                                    $        0.00               0.02
      Net loss                                                                   $       (0.88)     $       (0.09)

      Weighted average common shares                                                23,251,363         22,848,680

      Weighted average common  and potential common shares                          23,251,363         22,848,680
</TABLE>



     See accompanying notes to consolidated condensed financial statements.

                                       5
<PAGE>   6

                    FSI INTERNATIONAL, INC. AND SUBSIDIARIES
                 CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
                        FOR THE NINE-MONTHS ENDED MAY 29,
                        1999 AND MAY 30, 1998 (Unaudited)


<TABLE>
<CAPTION>
                                                                                    May 29,                May 30,
                                                                                      1999                  1998
                                                                                 ----------------    -----------------
<S>                                                                              <C>                 <C>
Sales (including sales to affiliates of
      $17,350,000 and $47,918,000, respectively)                                 $    80,836,840     $    134,042,905
Cost of goods sold                                                                    56,965,694           80,899,793
                                                                                 ---------------     ----------------
      Gross profit                                                                    23,871,146           53,143,112

Selling, general and administrative expenses                                          26,148,497           38,212,974
Research and development expenses                                                     22,078,711           27,153,456
                                                                                 ---------------     ----------------
      Operating loss                                                                 (24,356,062)         (12,223,318)

Interest expense                                                                      (2,219,426)          (2,384,370)
Interest income                                                                        3,653,531            3,590,751
Other income (expense), net                                                              217,189                7,824
                                                                                 ---------------     ----------------
      Loss before income taxes                                                       (22,704,768)         (11,009,113)

Income tax expense (benefit)                                                           6,608,850           (3,560,941)
                                                                                 ---------------     ----------------

      Loss before equity in (loss) earnings of affiliates                            (29,313,618)          (7,448,172)

Equity in (loss) earnings of affiliates                                               (1,956,827)             566,683
                                                                                 ---------------     ----------------

      Net loss from continuing operations                                            (31,270,445)          (6,881,489)

      Discontinued operations:
      Income (loss) from operations                                                   (3,769,040)           2,183,278
                                                                                 ---------------     ----------------

      Net loss                                                                    $  (35,039,485)     $    (4,698,211)
                                                                                 ===============     ================

Net income (loss) per common share - basic:
      Continuing operations                                                       $        (1.35)     $         (0.30)
      Discontinued operations                                                     $        (0.16)     $          0.09
      Net loss                                                                    $        (1.51)     $         (0.21)

Net income (loss) per common share - diluted:
      Continuing operations                                                       $        (1.35)     $         (0.30)
      Discontinued operations                                                     $        (0.16)     $          0.09
      Net loss                                                                    $        (1.51)     $         (0.21)

      Weighted average common shares                                                  23,156,150           22,737,537

      Weighted average common and potential common shares                             23,156,150           22,737,537
</TABLE>

     See accompanying notes to consolidated condensed financial statements.


                                       6

<PAGE>   7
                    FSI INTERNATIONAL, INC. AND SUBSIDIARIES
                 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
             FOR THE NINE MONTHS ENDED MAY 29, 1999 AND MAY 30, 1998
                                   (Unaudited)

<TABLE>
<CAPTION>

                                                                                 May 29,             May 30,
                                                                                  1999                 1998
                                                                            ------------------   -----------------
<S>                                                                         <C>                  <C>
OPERATING ACTIVITIES:
      Net loss                                                               $    (35,039,485)    $    (4,698,211)
      Adjustments to reconcile net loss to net cash
      provided by operating activities:
          (Income) loss from discontinued operations                                3,769,040          (2,183,278)
          Provision for deferred income taxes                                      (9,497,045)                 51
          Valuation reserve for deferred income taxes                              16,609,667                   -
          Allowance for doubtful accounts                                            (539,949)             99,863
          Inventory reserves                                                          651,826           1,080,956
          Depreciation and amortization                                             8,957,772          10,449,473
          Equity in (earnings) loss of affiliates                                   1,956,827            (566,683)
          Changes in operating assets and liabilities:
              Trade accounts receivable                                             4,308,153           3,455,859
              Inventories                                                           4,604,114          (4,434,330)
              Refundable income taxes                                               9,769,314          (4,555,683)
              Prepaid expenses and other current assets                               203,968            (705,727)
              Trade accounts payable                                                3,007,073          (6,962,946)
              Accrued expenses                                                     (1,942,304)           (965,818)
              Customer deposits                                                       834,789           2,585,886
              Deferred revenue                                                     (8,168,245)          2,550,665
              Other                                                                    19,613            (418,198)
                                                                            -----------------    ----------------
           Net cash used by operating activities                                     (494,872)         (5,268,121)

INVESTING ACTIVITIES:
      Acquisition of property, plant and equipment                                 (7,487,017)         (2,392,802)
      Purchase of marketable securities                                           (53,583,790)        (23,435,560)
      Sales of marketable securities                                                6,971,481                   -
      Maturities of marketable securities                                          27,771,154          10,400,206
      Decrease (increase) in deposits and other assets                             (1,081,601)            385,819
      Proceeds from sale of equipment                                                 470,500                   -
                                                                            -----------------    ----------------
          Net cash used in investing activities                                   (26,939,273)        (15,042,337)

FINANCING ACTIVITIES:
      Principal payments on long-term debt                                            (55,158)            (96,817)
      Net proceeds from issuance of common stock                                    1,610,836           2,334,465
                                                                            -----------------    ----------------
           Net cash provided by financing activities                                1,555,678           2,237,648
Cash provided by discontinued operations                                              530,255           5,003,524
                                                                            -----------------    ----------------
Decrease in cash and cash equivalents                                             (25,348,212)        (13,069,286)

Cash and cash equivalents at beginning of period                                   72,789,811          75,442,783
                                                                            -----------------    ----------------
Cash and cash equivalents at end of period                                  $      47,441,599    $     62,373,497
                                                                            =================    ================

</TABLE>


     See accompanying notes to consolidated condensed financial statements.


                                       7
<PAGE>   8
                    FSI INTERNATIONAL, INC. AND SUBSIDIARIES

              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

                                   (Unaudited)

 (1)     CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

         The accompanying consolidated condensed financial statements have been
         prepared by FSI International, Inc. ("the Company") without audit and
         reflect all adjustments (consisting only of normal and recurring
         adjustments) which are, in the opinion of management, necessary to
         present a fair statement of the results for the interim periods
         presented. The statements have been prepared in accordance with the
         regulations of the Securities and Exchange Commission but omit certain
         information and footnote disclosures necessary to present the
         statements in accordance with generally accepted accounting principles.
         The results of operations for the interim periods presented are not
         necessarily indicative of the results to be expected for the full
         fiscal year. These consolidated condensed financial statements should
         be read in conjunction with the Consolidated Financial Statements and
         footnotes thereto included in the Company's Annual Report on Form 10-K
         for the fiscal year ended August 29, 1998 previously filed with the
         Securities and Exchange Commission.

(2)      INVENTORIES

         Inventories are summarized as follows:

<TABLE>
<CAPTION>
                                                                                      May 29,              August 29,
                                                                                      1999                    1998
                                                                                ------------------     -------------------
<S>                                                                             <C>                    <C>
           Finished products                                                           $2,515,453              $4,086,038
           Work-in-process                                                             11,200,619               9,112,431
           Subassemblies                                                                4,564,810               8,651,265
           Raw materials and purchased parts                                           17,951,384              19,638,472
                                                                                -----------------      ------------------
                                                                                      $36,232,266             $41,488,206
                                                                                =================      ==================
</TABLE>



(3)      SUPPLEMENTARY CASH FLOW INFORMATION

<TABLE>
<CAPTION>
                                                                                            Nine Months Ended
                                                                                      May 29,                May 30,
                                                                                       1999                    1998
                                                                                ------------------    --------------------
<S>                                                                                 <C>                      <C>
            Schedule of interest and income taxes (received) paid:

                  Interest                                                            $ 1,434,474              $1,599,418

                  Income taxes                                                       ($11,840,284)             $2,237,406
</TABLE>

         The Company realized a tax benefit from the exercise of stock options
         of $49,718 and $213,486 in the first nine months of fiscal 1999 and
         1998, respectively.

(4)      RECONCILIATION OF EARNINGS AND SHARE AMOUNTS USED IN EPS CALCULATION

         Basic earnings per common share were computed by dividing net income or
         loss from continuing and discontinued operations by the weighted
         average number of shares of common stock outstanding during the period.
         Diluted earnings per common share for the quarters and nine months
         ended May 29, 1999 and May 30, 1998 were calculated using the treasury
         stock method to compute the weighted average common stock outstanding
         assuming the conversion of dilutive potential common shares. The effect
         of stock options were not in the calculation of dilutive earnings per
         share for the quarters and the nine months ended May 29, 1999 and May
         30, 1998 because their inclusion would have been anti-dilutive.


                                       8
<PAGE>   9

                    FSI INTERNATIONAL, INC. AND SUBSIDIARIES

(5)      COMPREHENSIVE INCOME (LOSS)

         Statement of Financial Accounting Standards No. 130 (SFAS No. 130),
         "Reporting Comprehensive Income" requires that an entity report a total
         for comprehensive income (loss) in condensed financial statements of
         interim periods issued to shareholders. For the quarters and nine
         months ended May 29, 1999 and May 30, 1998 net loss, items of other
         comprehensive loss and comprehensive loss are as follows:

<TABLE>
<CAPTION>

                                                                               May 29,                May 30,
                                                                                1999                   1998
                                                                          ------------------     -----------------
<S>                                                                       <C>                    <C>
         FOR THE QUARTERS ENDED:

         Net loss                                                              $(20,386,836)          $(1,986,546)
         Items of other comprehensive loss:
                  Foreign currency translation                                     (399,168)             (678,366)
                                                                          -----------------      ----------------
         Comprehensive loss                                                    $(20,786,004)          $(2,664,912)
                                                                          =================      ================

         FOR THE NINE MONTHS ENDED:

         Net loss                                                              $(35,039,485)          $(4,698,211)
         Items of other comprehensive loss:
                  Foreign currency translation                                      666,994            (1,414,367)
                                                                          -----------------      ----------------
         Comprehensive loss                                                    $(34,372,491)          $(6,112,578)
                                                                          =================      ================
</TABLE>


(6)      DEFERRED TAX ASSETS AND RELATED VALUATION ALLOWANCE

         During the third quarter of fiscal 1999, the Company recorded a
         valuation allowance against its deferred tax assets of approximately
         $16.6 million or $0.71 per share. The valuation allowance was recorded
         primarily due to the Company's continued losses. As of May 29, 1999 the
         Company had recorded net deferred tax assets of approximately $10.1
         million. Based on an assessment of the Company's taxable earnings'
         history and prospective future taxable income, as well as tax planning
         strategies available to management, which includes the sale or disposal
         of assets to produce current taxable income, management has determined
         it to be more likely than not that its net deferred tax asset will be
         realized in future periods. This amount is expected to be recoverable
         upon the completion of the divestiture of the Chemical Management
         division. The Company may be required to provide an additional
         valuation allowance for this asset in the future if the transaction
         does not occur.

(7)      SUBSEQUENT EVENT - DIVESTITURE OF THE CHEMICAL MANAGEMENT DIVISION

         On June 9, 1999, the Company agreed to sell its Chemical Management
         division to the BOC Group, Inc., a Delaware corporation ("BOC"), for
         approximately $38 million in cash, subject to adjustment based upon
         changes in net working capital from April 3, 1999 through closing. As
         of April 3, 1999, the Chemical Management division's net assets were
         carried at a net book value of approximately $11 million. Therefore,
         the Company expects to report a pre-tax gain of approximately $25
         million, net of transaction costs of approximately $2.0 million.* The
         Chemical Management division designs and manufactures chemical
         management systems that generate, blend and dispense high purity
         chemicals, and blend and deliver slurries, to points of use in a
         manufacturing facility, as well as related controls and support
         products. As a result of management's decision to enter into this
         agreement with BOC, the Company has reflected the operations of the
         Chemical Management division in its financial statement as discontinued
         operations.

         The closing of the sale of the Chemical Management division to BOC will
         depend upon whether the conditions specified in the asset purchase
         agreement are ultimately satisfied. In addition to standard

                                       9

<PAGE>   10

         closing conditions, the obligations of both the Company and BOC to
         close the sale are subject to receipt of any necessary approvals under
         the Hart-Scott-Rodino Act, the completion and execution of a technology
         license agreement, a shared services agreement and a sublease agreement
         between the Company and BOC, and the receipt of required third-party
         consents to the sale. If any conditions to the sale remain unsatisfied
         and the sale has not been completed by September 30, 1999, the
         transaction may be terminated.

         Under the asset purchase agreement, the Company has agreed to either
         retain or indemnify BOC with respect to certain specified obligations
         and liabilities of the Chemical Management division.













                                       10
<PAGE>   11

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

THIRD QUARTER AND FIRST NINE MONTHS OF FISCAL 1999 COMPARED WITH THE THIRD
QUARTER AND FIRST NINE MONTHS OF FISCAL 1998.

The information in this report, except for the historical information contained
herein, contains forward-looking statements within the meaning of Section 21E of
the Securities Exchange Act of 1934, as amended, and is subject to the safe
harbor created by that statute. Such statements are subject to various risks and
uncertainties. Actual results may be materially different from these
forward-looking statements. Factors that could cause actual results to differ
include overall industry conditions including general economic conditions; the
demand and price for semiconductors; the level of new orders and order delays or
cancellations; product pricing pressures; expenses associated with the pending
YieldUP International Corporation (YieldUP) acquisition including a possible
in-process research and development write-off; patent infringement litigation of
YieldUP if the acquisition of YieldUP is consummated; the expenses associated
with the pending divestiture of the Chemical Management division; the timing and
success of current and future product and process development programs; the
success of the Company's affiliated distributors; the timing and extent of any
industry upturn or downturn and the successful implementation of new business
systems. Readers are directed to the Risk Factors discussion found in the
Company's Report on Form 10-K for the year ended August 29, 1998. In addition,
readers are also directed to the Risk Factors discussion found below under "Risk
Factors". Readers also are cautioned not to place undue reliance on these
forward-looking statements as actual results could differ materially. The
Company assumes no obligation to publicly release any revisions or updates to
these forward-looking statements to reflect future events or unanticipated
occurrences. Such forward-looking statements are marked with an asterisk (*).

FSI International, Inc., ("FSI" or the "Company"), designs, develops,
manufactures, markets and supports microlithography, surface conditioning and
chemical management equipment used in the fabrication of microelectronics, such
as advanced semiconductor devices and thin film heads.

Industry conditions for many semiconductor device manufacturers appear to be
continuing to improve as semiconductor device demand is being fueled by sales of
personal computers and demand for devices used for internet access and
e-commerce.

However, it appears DRAM pricing remains under pressure as the industry moves
into the slow summer season. Certain DRAM manufacturers are optimistic that they
will see higher prices in the fall as capacity utilization rates improve. In
fact, certain DRAM manufacturers believe that the industry could see shortages
of certain devices in early 2000.

Bookings for front-end semiconductor process equipment, as reported by North
American equipment companies, increased to $1.04 billion in May 1999 as compared
to $754 million in January 1999. During this same period, shipments have
increased from $672 million to $853 million. The industry book-to-bill ratio was
1.21 in May, representing the fifth consecutive month that it has been above
1.0.

However, the larger equipment companies with good market share positions have
received a proportionally higher percentage of the new orders placed by
semiconductor manufacturers. A device focused consolidation trend appears to be
occurring in the semiconductor industry, while a process technology
consolidation trend appears to be occurring in the semiconductor equipment
industry. Many of the equipment companies have excess manufacturing capacity;
therefore, this is leading to strong pricing pressure among the small and
mid-cap equipment companies.

The Company has four segments, Surface Conditioning Division (SCD), Chemical
Management Division (CMD), Microlithography Division (MLD) and Shared Services
(SS).

Due to the similarity of production processes, distribution methods, customer
base and products/services, the



                                       11
<PAGE>   12

reporting of segment information is aggregated for the Surface Conditioning and
Microlithography Divisions.

The Surface Conditioning segment sells products, processes and services using
wet, vapor and cryogenic techniques to prepare the surfaces of silicon wafers
for subsequent processing. The Microlithography segment supplies photoresist
processing equipment and services for the semiconductor and thin film head
markets, plating equipment for the thin film industry and recently introduced a
spin on dielectrics system for the semiconductor industry.

The Chemical Management segment supplies a wide range of chemical management
systems for microelectronics manufacturers. These systems generate, blend and
deliver chemicals to all points of use in a manufacturing facility. This segment
is being treated as discontinued operations for purposes of financial statement
presentation due to the pending divestiture. (See note 6 to the financial
statements).

The Shared Services segment consists of legal, marketing, finance, information
services, human resources and other administrative activities. None of the
Shared Service costs are allocated to the other segments.

The following table sets forth on a consolidated basis, for the fiscal period
indicated, certain income and expense items from continuing operations as a
percent of total sales.

<TABLE>
<CAPTION>

                                                             Percent of Sales                      Percent of Sales
                                                               Quarter Ended                      Nine Months Ended
                                                     ----------------------------------     -------------------------------
                                                     ----------------------------------     -------------------------------
                                                         May 29,            May 30,            May 29,           May 30,
                                                          1999               1998               1999              1998
                                                     ----------------    --------------     --------------     ------------
<S>                                                  <C>                 <C>                <C>                <C>
Sales                                                          100.0%            100.0%             100.0%           100.0%
Cost  of goods sold                                             72.0              58.1               70.5             60.4
Gross profit                                                    28.0              41.9               29.5             39.6
Selling, general and administrative                             22.6              30.9               32.3             28.5
Research and development                                        19.6              22.6               27.3             20.2
Operating loss                                                 (14.2)            (11.6)             (30.1)            (9.1)
Other income (expense), net                                      1.2               1.1                2.0              0.9
Loss before income taxes                                       (13.0)            (10.5)             (28.1)            (8.2)
Income tax (benefit) expense                                    39.2              (3.6)               8.2             (2.7)
Equity in earnings (loss) of affiliates                         (2.3)              0.3               (2.4)             0.4
                                                     ---------------     -------------      -------------      -----------
         Net loss from continuing operations                   (54.5)%            (6.6)%            (38.7)%           (5.1)%
                                                     ===============     =============      =============      ===========
</TABLE>


Segment information for the continuing operations is as follows:


<TABLE>
<CAPTION>

                                                         Quarter Ended                         Nine Months Ended
                                              ------------------------------------    -------------------------------------
                                                   May 29,            May 30,              May 29,             May 30,
                                                    1999               1998                 1999                1998
                                              -----------------   ----------------    -----------------   -----------------
<S>                                             <C>                <C>                  <C>                <C>
MLD & SCD
--------------------------------------------
Revenue from external customers                    $37,673,719        $39,322,137          $80,836,840        $134,042,905
Depreciation and amortization                        1,138,933          1,469,318            3,705,878           4,179,456
Segment operating profit (loss)                    $(1,840,562)        $2,097,982         $(11,533,742)        $10,437,318

SHARED SERVICES
--------------------------------------------
Revenue from external customers                              -                  -                    -                   -
Depreciation and amortization                         $942,669         $1,717,176          $ 5,251,894         $ 6,270,017
Segment operating loss                             $(3,485,235)       $(6,642,905)        ($12,822,320)       ($22,660,636)

</TABLE>


                                       12
<PAGE>   13

DIVESTITURE OF THE CHEMICAL MANAGEMENT DIVISION

On June 9, 1999 the Company announced that it entered into an agreement with The
BOC Group, Inc. ("BOC"), on behalf of its BOC Edwards Business Unit, to sell the
Chemical Management division to BOC for approximately $38 million. The purchase
price is subject to an adjustment for the change in net working capital of the
division from April 3, 1999 through closing. As of April 3, 1999, the Chemical
Management division's net assets were carried at a net book value of
approximately $11 million. Therefore, the Company expects to report a pre-tax
gain of approximately $25 million, net of transaction costs of approximately
$2.0 million.* Taxes on this transaction are expected to be approximately $9.5
million.* The Company's goal is to complete the closing in early August.*
Completion of the deal is subject to various conditions, including regulatory
approvals.

Prior to closing, it is expected that BOC will make offers to approximately 235
or 24% of the Company's 970 employees.* As part of the transaction, BOC will
acquire the Chemical Management division's operation (subsidiaries) in Newhaven,
England; Hollister, California; and Kyungki-do, Korea. The Chemical Management
division will continue to operate out of the Chaska, Minnesota facility, thus
reducing the Company's infrastructure by approximately 70,000 square feet. In
addition, at closing BOC Edwards has agreed to hire the employees of the
Company's affiliate, Metron Technology, that are dedicated to the chemical
management business in Europe and Asia and purchase the related business
inventory. BOC will use the Company's affiliate, m-FSI, as their distributor in
Japan for Chemical Management products.

In conjunction with the transaction, the Company will license back from BOC
certain chemical management intellectual property for use in the other divisions
of the Company. This is a worldwide, royalty-free license. The Company believes
BOC Edwards will become a strategic partner of the Company going forward.

Segment information for the Chemical Management division is as follows:


<TABLE>
<CAPTION>
                                                          Quarter Ended                         Nine Months Ended
                                              ------------------------------------    -------------------------------------
                                                     May 29,             May 30,            May 29,              May 30,
                                                      1999                1998               1999                 1998
                                              -----------------   ----------------    -----------------   -----------------
<S>                                                <C>                <C>                <C>                 <C>
CMD
--------------------------------------------
Revenue from external customers                    $12,896,057        $16,513,797          $36,960,775          $46,139,315
Depreciation and amortization                        1,102,831            941,655            1,674,840            1,519,068
Segment operating profit (loss)                       (398,860)           510,698           (4,611,764)           1,402,293
Net income (loss) from segment                        $152,135           $594,274          $(3,769,040)          $2,183,278
</TABLE>


Sales and gross profit margins for the CMD division continue to be impacted by
pricing pressures and overall competition. In addition, during the first nine
months of fiscal 1999, the division experienced significant losses of
approximately $2.0 million on a turnkey project in Asia.

SALES
Sales were $37.7 million for the third quarter of fiscal 1999 as compared to
$39.3 million for the third quarter of fiscal 1998. Sales were $80.8 million for
the first nine months of fiscal 1999 as compared to $134.0 million for the first
nine months of fiscal 1998. The decrease in sales for the third quarter of
fiscal 1999 as compared to the third quarter of fiscal 1998 is due to decreased
sales for the Surface Conditioning division products. Sales decreased across all
product lines for the first nine months of fiscal 1999 as compared to the prior
year's comparable period.

International sales were $10.1 million, and $15.2 million for the third quarter
of fiscal 1999 and 1998, respectively, and represented approximately 27% and
39%, respectively, of sales during these periods. International sales were $20.0
million and $50.9 million for the first nine months of fiscal 1999 and 1998,
respectively, and represented 25% and 38%, respectively, of sales during these
periods. Due to industry conditions, the Company's sales to affiliates, Metron
Technology B.V. and m-FSI Ltd. were significantly impacted. The decrease in
international sales in the third quarter and the first nine months of fiscal
1999 as compared to the same fiscal 1998 periods


                                       13
<PAGE>   14

occurred primarily in Europe and Japan. The decrease in sales for the first nine
months in Europe was $17.4 million and the decrease in Japan was $6.5 million.

Along with the industry, the Company saw order activity increase in the third
quarter as compared to the second quarter of fiscal 1999. Based upon industry
forecasts, the Company expects the order activity to continue to improve over
the next few quarters, particularly in the Asia-Pacific region.*

GROSS PROFIT

Gross profit as a percentage of sales for the third quarter of fiscal 1999 was
28.0% as compared to 41.9% for the third quarter of fiscal 1998. Gross profit as
a percentage of sales for the first nine months of fiscal 1999 was 29.5% as
compared to 39.6% for the first nine months of fiscal 1998. The gross profit
margin percentage for the third quarter and first nine months of fiscal 1999
were significantly impacted due to lower revenue levels, pricing pressures for
all products and excess capacity.

Margins were also impacted due to the low margins on the initial shipments of
the new POLARIS(R) 2500 Cluster. Given the competitive pricing pressures, there
is a concentrated effort by the Microlithography division to improve the margins
on this product and value engineering will be a key focus of that effort going
forward.*

Overall, the Company's gross profit margin may fluctuate as a result of a number
of factors, including the mix of products sold, as some products have higher
margins than others, the proportion of international sales, as international
sales generally have lower margins, competitive pricing pressures and
utilization of manufacturing capacity.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses decreased 30% to $8.5 million for
the third quarter of fiscal 1999 as compared to $12.2 million for the third
quarter of fiscal 1998. Selling, general and administrative expenses decreased
32% to $26.1 million for the first nine months of fiscal 1999 as compared to
$38.2 million for the same period in fiscal 1998. The decrease in the amount of
SG&A expenses in the third quarter and first nine months of fiscal 1999 as
compared to the third quarter and first nine months of 1998 was primarily due to
the reduction in force and the overall cost controls implemented during the
fourth quarter of fiscal 1998 and the first quarter of 1999. The SG&A headcount
as of the end of third quarter 1999 decreased over 24% as compared to the end
of the third quarter of 1998. The Company will continue investing in worldwide
sales and support capability, continue expanding the Company's business system
applications and completing the Year 2000 hardware and software changes.*

RESEARCH AND DEVELOPMENT EXPENSES

Research and development expenses decreased 17% to $7.4 million for the third
quarter of fiscal 1999 as compared to $8.9 million for the same period in fiscal
1998. Research and development expenses decreased 19% to $22.1 million for the
first nine months of fiscal 1999 as compared to $27.2 million for the same
period in fiscal 1998. The Company's reduction in force and other cost controls
implemented during fiscal 1998 and the first quarter of fiscal 1999 were
strategic in nature in order to minimize the impact on key research and
development programs. The successful introduction of new products is important
to the long-term growth of the Company.* The Company will continue to remain
focused on critical technologies and strategically invest research and
development dollars.

OTHER INCOME (EXPENSE), NET

Other income (expense), net was approximately $448,000 and $1.7 million for the
third quarter and first nine months of fiscal 1999, respectively, as compared to
$418,000 and $1.2 million for the third quarter and first nine months of fiscal
1998, respectively. The increase in the amounts for the first nine months of
fiscal 1999 as


                                       14
<PAGE>   15

compared to the first nine months of fiscal 1998 is due to higher levels of
marketable securities generating income. The increase in the amounts for the
third quarter of fiscal 1999 as compared to the same period for fiscal 1998 is
due primarily to lower interest expense as the Company capitalizes interest
expense as it implements its new business information system.

INCOME TAX EXPENSE (BENEFIT)

The income tax expense (benefit) for the third quarter was a $14.8 million
income tax expense as compared to a $1.4 million income tax benefit for the
third quarter of 1998. The income tax expense (benefit) for the first nine
months was $6.6 million income tax expense as compared to a $3.6 million income
tax benefit for the comparable 1998 period. During the third quarter, the
Company recorded a valuation allowance of $16.6 million against its deferred tax
assets. This valuation allowance was recorded in accordance with SFAS No. 109,
primarily due to the Company's continued losses. The Company will not be
recording any tax benefit or expense in the future, except for taxes related to
the Chemical Management divestiture, until the Company is consistently
profitable on a quarterly basis.*

The Company has net deferred tax assets remaining on the balance sheet of
approximately $10.1 million. As of May 29, 1999, based on an assessment of the
Company's taxable earnings' history, prospective future taxable income, and tax
planning strategies, management has determined it is more likely than not that
its net deferred tax asset will be realized in future periods.* However, the
Company may be required to provide a valuation allowance for this asset in the
future if it does not generate sufficient taxable income as planned, such as the
expected $25 million pre-tax gain from the CMD divestiture.*

EQUITY IN (LOSS) EARNINGS OF AFFILIATES

The equity in (loss) earnings of affiliates was approximately a $876,000 loss
for the third quarter of fiscal 1999, compared to approximately $144,000 of
income for the third quarter of fiscal 1998. The equity in (loss) earnings of
affiliates was approximately a $2.0 million loss for the first nine months of
fiscal 1999, compared to $567,000 of income for the first nine months of fiscal
1998. The decrease in earnings is due to lower earnings at both affiliates
(Metron Technology B.V. and m-FSI Ltd.)

OUTLOOK

The Company does not normally provide detailed information on future financial
expectations; however, given the potential changes to the Company's business
model, due in part to the YieldUP acquisition and Chemical Management division
divestiture, the Company believes at this time it is appropriate to provide such
information.

Looking ahead to the fourth quarter of fiscal 1999 and the first quarter of
fiscal 2000, programs which the Company will be working on include:

-    The Chemical Management division divestiture including data/systems
     conversion and closing the transaction;
-    Completion of the YieldUP acquisition including regulatory filings;
-    AVALON to SAP data conversion, training, and SAP implementation;
-    New product introductions including the CALYPSO(TM) spin on dielectric
     product;
-    The YieldUP Model 8000 series product characterization/introduction;
-    POLARIS(R) 2500 cost reduction programs;
-    Finalize Year 2000 compliance programs; and
-    Fiscal Year 2000 strategic and financial plan completion.

Based upon the programs discussed, potential orders, and assuming that the
YieldUP acquisition and Chemical Management division divestiture close after the
end of the fourth quarter of fiscal 1999, fourth quarter 1999 results as
compared to the third quarter of fiscal 1999 are currently expected to be as
follows:


                                       15
<PAGE>   16

-    Orders booked are expected to increase based upon continued improvement of
     industry conditions;*
-    Sales are expected to be flat as 1999 third quarter sales included sales
     that were delayed from the second quarter due to timing of customer
     acceptance of a new product and a delayed shipment;*
-    Gross margin as a percentage of sales is expected to be flat;*
-    SG&A expenses are expected to increase due to costs associated with the
     divestiture of the Chemical Management division, which costs are expensed
     as incurred regardless of when the transaction is closed.* Costs will also
     increase due to the Company's participation in the July SEMICON/West
     industry trade show;*
-    Research and development costs are expected to increase due to efforts
     associated with new product development, 300-mm programs, and cost
     reduction efforts on the POLARIS(R) 2500;*
-    Other income/expense including interest income/expense is expected to
     remain flat or increase income slightly;*
-    There will be no tax benefit or expense recorded based upon the assumptions
     previously discussed; and*
-    Equity in losses of affiliates is expected to be a smaller loss.*

FOURTH QUARTER OF FISCAL 1999

The YieldUP acquisition and the Chemical Management division divestiture are
expected to have the following significant financial impacts when and if
consummated;

-    The Company expects to recognize a gain on the Chemical Management division
     divestiture of approximately $15.5 million which is net of $9.5 million of
     taxes;*
-    The Company currently expects to have a one-time in-process research and
     development charge relating to the acquisition of YieldUP of approximately
     $7.0 million depending on the status of certain YieldUP research and
     development projects at closing; and*
-    Sales levels would decrease as a result of the Chemical Management division
     divestiture partially offset by sales from YieldUP.*

FISCAL YEAR 2000

Fiscal year 2000 will be a rebuilding year for the Company as it strives to
complete all the programs previously discussed and as it transitions to a new
business model.

The Company continues to work on its strategic and financial plan and currently,
based on industry forecasts, expects the following financial results for fiscal
2000:

-    Orders are expected to continue to increase assuming industry conditions
     continue to improve worldwide;*
-    Sales are expected to increase for the remaining two divisions as compared
     to fiscal 1999 again assuming industry conditions continue to improve;*
-    Gross margins are expected to be in the low to mid-30 percent range as the
     Company expects to continue to experience pricing pressures and the impact
     from its excess capacity.* Successful cost reduction programs could result
     in further improvements in the second half of fiscal 2000;*
-    SG&A expenses are expected to average between $9.0 and $10.0 million per
     quarter, subject to the successful implementation of SAP, completing our
     Y2K compliance programs, and successful cost reduction programs;*
-    R&D expenses are expected to average $7.0 to $8.0 million per quarter, as
     the Company continues to work on 300-mm programs, CALYPSO(TM) spin on
     dielectric system, and YieldUP Model 8000 series product introduction;*
-    Other income/expense including interest income and expense is expected to
     increase income as a result of higher levels of cash due to the proceeds
     from the Chemical Management division divestiture offset by cash paid as
     part of the YieldUP acquisition;*
-    It is expected there will be no tax benefit or expense until the Company
     can demonstrate quarterly profitability; and*
-    Equity in earnings/losses of affiliates is expected to continue to improve
     throughout the year as industry conditions improve in the Asia-Pacific
     region.*


                                       16
<PAGE>   17

Currently, the Company does not expect to return to profitability before the
fourth quarter of fiscal 2000.* The Company believes, under the future business
model, that the current break-even level for the Company is expected to be
approximately $45 million of revenues per quarter assuming a 35% gross profit
margin.*

LIQUIDITY AND CAPITAL RESOURCES

The Company's cash and cash equivalents and marketable securities were
approximately $79.8 million as of May 29, 1999, a decrease of $6.5 million from
the end of fiscal 1998. The majority of the decrease in cash, cash equivalents
and marketable securities is due to approximately $495,000 in cash used in
operations and approximately $7.5 million of capital expenditures, offset by
$530,000 in cash provided by discontinued operations.

The Company's accounts receivable decreased by approximately 12% or $3.8 million
from the end of fiscal 1998. The decrease in accounts receivable is due to lower
sales revenues along with additional resources being dedicated to collection
efforts.

The Company's inventory decreased approximately $5.3 million to $36.2 million at
May 29, 1999 compared to $41.5 million at the end of fiscal 1998. The decrease
in inventory is due to the Company's emphasis on inventory management and
reduction in inventory purchases.

As of May 29, 1999, the Company's current ratio of current assets to current
liabilities was 4.1 to 1.0 and working capital was $130.9 million.

The Company had acquisitions of property, plant and equipment of approximately
$7.5 million and $2.4 million for the first nine months of fiscal 1999 and 1998,
respectively. The continuing acquisitions reflect investments in information
systems and other strategic programs.

During the second quarter of 1999, the Company announced the proposed
acquisition of YieldUP. The Company is in the process of filing the necessary
regulatory documents and anticipates a closing later in the fourth quarter of
fiscal 1999 or early in the first quarter of fiscal 2000.* Upon consummation of
the proposed merger, each outstanding share of YieldUP common stock will be
converted into the right to receive 0.1567 shares of common stock of the Company
and cash in the amount of $0.7313. Cash also will be paid in lieu of the
issuance of any fractional shares. As of March 31, 1999, YieldUP had
approximately 8,260,000 shares of common stock outstanding. This acquisition
will provide the Surface Conditioning division with an entree into the critical
cleaning immersion market. By acquiring YieldUP and its intellectual property,
the Company believes that it is obtaining unique immersion technologies that
will expand the Company's capabilities to create a total cleaning solution for
customers.* This acquisition will be accounted for under the purchase accounting
method and is expected to be dilutive for fiscal 2000.*

The Company has short-term debt of approximately $60,000 relating to equipment
capital leases with interest rates ranging from 8.83% to 12.68%. The Company has
long-term debt of $42.0 million. The long-term debt is a private placement
primarily of unsecured notes with various insurance companies. The long-term
debt has maturity dates through December 2006 and has interest rates ranging
from 7.15% to 7.27%. The notes are subject to certain affirmative and negative
covenants, including financial ratio tests such as an indebtedness ratio and a
tangible net worth test. Based upon the Company's current results along with the
anticipated increases in intangible asset balances on the Company's balance
sheet in connection with the YieldUP acquisition, the Company expects it may be
in noncompliance with the debt covenants in the fourth quarter of 1999 or the
first quarter of fiscal 2000.* The failure to meet these covenants could result
in additional fees for waivers, amendments to the notes requiring a security
interest in the Company's assets and/or higher interest rates or prepayment of
the notes with potential penalties. The Company is currently analyzing this
situation and is discussing the analysis with the note holders.


                                       17
<PAGE>   18

The Company believes that even if it is required to prepay the $42.0 million of
long-term debt, that with its remaining cash, cash equivalents, marketable
securities and internally generated funds, there would be sufficient funds to
meet the Company's currently projected working capital and other cash
requirements through at least fiscal 2000.*

The Company believes that success in its industry requires substantial capital
to maintain the flexibility to take advantage of opportunities as they arise.
The Company may, from time to time, as market and business conditions warrant,
invest in or acquire complementary businesses, products or technologies.* The
Company may fund such activities with additional equity or debt financings. The
sale of additional equity or debt securities could result in additional dilution
to the Company's stockholders.

NEW ACCOUNTING PRONOUNCEMENTS

In February 1998, the FASB issued SFAS No. 132, "Employers' disclosures about
Pensions and other Postretirement Benefits" which requires companies to disclose
certain information about pensions and other postretirement benefits. SFAS No.
132 must be adopted for financial statements issued for fiscal years beginning
after December 15, 1997. The Company will adopt SFAS No. 132 in fiscal 1999.
This statement will effect disclosures related to the Company's pension plan,
but will not effect the financial statements.

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which establishes appropriate accounting for
derivative instruments and hedging activities. SFAS No. 133 must be adopted for
financial statements issued for fiscal years beginning after June 15, 2000. It
is anticipated that the Company will adopt SFAS No. 133 in fiscal 2001, and is
currently studying the expected impact.

RISK FACTORS

Due to the nature of business and the industry in which the Company operates,
the following risk factors should be considered in addition to others described
above.

CYCLICALITY AND VOLATILITY IN THE INDUSTRY MAY ADVERSELY AFFECT THE COMPANY'S
RESULTS

The Company's business depends upon the capital equipment expenditures of
microelectronics manufacturers, which in turn depend on the current and
anticipated market demand for semiconductor devices and products utilizing
semi-conductor devices. The microelectronics industry has been cyclical in
nature and has experienced periodic downturns. Certain semiconductor device
manufacturers have experienced slowdowns in terms of product demand and
volatility in terms of product pricing. Industry slowdowns and volatility have
caused the semiconductor device manufacturers to reduce their demand for
semiconductor processing equipment and, in some instances, to delay capital
equipment decisions. In some cases this has resulted in order cancellations or
delays of orders and delay of delivery dates for the Company's products. No
assurance can be given that the Company's sales and operating results will not
be adversely affected by future slowdowns in the semiconductor industry.

In addition, the need for continued investments in research and development,
substantial capital equipment requirements and extensive ongoing worldwide
customer service and support capability will limit the Company's ability to
reduce expenses.

RISK OF DELAYS IN INTRODUCING NEW PRODUCTS AND THE MARKET'S ACCEPTANCE OF SUCH
PRODUCTS COULD ADVERSELY IMPACT THE COMPANY'S RESULTS

Microelectronics manufacturing equipment and processes are subject to rapid
technological change and new product introductions, as well as evolving industry
standards. The Company believes microelectronics manufacturers are increasingly
relying on equipment manufacturers to design and develop more efficient
equipment, to design and implement improved processes for the benefit of
microelectronics manufacturers and to integrate their equipment with that of
other equipment manufacturers. The Company must continue to develop,


                                       18
<PAGE>   19

manufacture and market new products that conform to evolving industry standards.
The success of the Company in developing, introducing and selling new and
enhanced equipment depends upon a variety of factors including product
selection, timely and efficient completion of product design and development,
timely and efficient implementation of manufacturing and assembly processes,
product performance in the field, and effective sales and marketing. The Company
must also manage product transitions successfully, as introductions of new
products could adversely affect the sales of existing products. The Company's
failure to develop and successfully introduce new products or enhancements to
its existing products and processes or achieve market acceptance of the new
products or enhancements could adversely affect the Company's business and
results of operations.

IDLE FACILITIES AND RELATED INFRASTRUCTURE COSTS MAY ADVERSELY AFFECT THE
COMPANY'S RESULTS

The Company added manufacturing capacity with new facilities during fiscal 1997.
This additional manufacturing capacity is having a negative impact on gross
profit margins due to lower revenue levels that are currently being experienced.
These additional facilities and related infrastructure costs have also increased
the overall operating expenses of the Company. The potential impact of idle
manufacturing capacity on gross margins and related infrastructure costs will
have an adverse impact on the Company's future financial results until the
Company is able to increase its utilization rates.

VOLATILITY OF THE COMPANY'S STOCK PRICE

The Company's common stock has experienced in the past, and could experience in
the future, substantial price volatility as a result of a number of factors,
including quarter-to-quarter variations in the actual or anticipated financial
results of the Company, announcements by the Company, its competitors or
customers, government regulations and developments in the industry. In addition,
the stock market has experienced extreme price and volume fluctuations, which
have affected the market price of many technology companies in particular, and
which have at times been unrelated to the operating performance of the specific
companies whose stock is traded. Broad market fluctuations, as well as economic
conditions generally and, in the microelectronics industry specifically, may
adversely affect the market price of the Company's common stock.

FLUCTUATIONS IN THE COMPANY'S QUARTERLY OPERATING RESULTS

The Company's operating results have in the past been, and may continue to be,
subject to quarterly fluctuations due to a number of factors. The Company may
experience significant fluctuations in its quarterly sales, gross profits,
operating results, and net income. Factors which may influence the Company's
operating results in a given quarter include specific economic conditions in the
microelectronics industry, the financial results of the Company's affiliates,
the timing of the receipt of orders from major customers, the mix of products
sold by the Company, competitive pricing pressures, the proportion of
international sales, product modifications requested by customers, utilization
of manufacturing capacity, and production ability. During a specific quarter, a
significant portion of the Company's revenue may be derived from the sale of a
relatively small number of systems. Accordingly, a small change in the numbers
of such systems sold in a quarter may cause significant changes in operating
results. Moreover, customers may cancel or reschedule shipments and parts
availability could delay shipments. These factors also could significantly
affect annual results of operations.

SUCCESS OF COMPANY'S AFFILIATED DISTRIBUTORS IMPACTS THE COMPANY'S OPERATIONS

The majority of the Company's international sales are made through its
affiliated distributors, Metron Technology B.V., ("Metron") and m-FSI Ltd.
("m-FSI"). These affiliated distributors also provide service and support to
many of the Company's international customers. The affiliated distributors also
sell other principals' products. A reduction in the sales efforts or financial
viability of such distributors or a loss of a significant principal by a
distributor could affect the Company's results of operations.

The earnings or losses of the Company's affiliated distributors can
significantly affect the financial results of the Company. The affiliated
distributors distribute not only the Company's products but also distribute or
represent

                                       19
<PAGE>   20

those of other companies serving the microelectronics industry. Over the past
several years, a majority of Metron's revenues have been attributable to sales
of products of equipment and consumable suppliers other than FSI. Thus, the
financial results of Metron and their impact on the Company's financial results
are dependent not only upon the ability of Metron to successfully market the
Company's products, but also on their ability to maintain relationships with and
market the products of other equipment and consumable suppliers. While sales of
the Company's products by Metron (and of certain other manufacturers for whom
they distribute) are generally in U.S. dollars, the expenses of Metron are
generally denominated in foreign currencies and, accordingly, Metron's operating
results may be affected by fluctuations in interest and currency exchange rates.
In addition, sales by m-FSI are denominated in yen and, accordingly, the
Company's equity interests in the earnings of m-FSI are affected by U.S.
dollar/yen exchange rates.

The Company's affiliated distributors periodically engage in hedging
transactions in an effort to lessen the potentially negative effect of foreign
currency devaluation in relation to the U.S. dollar. This typically occurs in
those instances where a sale by an affiliated distributor has been both in a
foreign currency (usually at the request of a foreign-domiciled customer) and of
a size to justify the costs of engaging in hedging activity. The Company's
affiliated distributors generally have hedged such transactions by buying
forward U.S. dollars and selling forward the applicable local currency. If the
order that is the subject of a hedging transaction is subsequently canceled by
the customer, the affiliated distributor may be required to satisfy its hedging
obligations by buying and/or selling the applicable currencies at market prices
that could result in losses to the affiliated distributor. To date, the Company
has not experienced any material adverse effect as a result of the hedging
activities of its affiliated distributors. There can be no assurance that Metron
or m-FSI will continue to distribute, or to distribute successfully, the
Company's products or the products of other microelectronics and consumable
companies, and in such an event the Company's results of operations and earnings
could be adversely affected. The Company is not aware of any financial
difficulties being experienced by any of its affiliated distributors that could
materially adversely affect the Company's financial condition or results of
operations.

THE COMPANY'S RESULTS MAY BE ADVERSELY AFFECTED BY FLUCTUATIONS IN CURRENCY
EXCHANGE RATES

Almost all of the Company's direct international sales are denominated in U.S.
dollars. Nonetheless, changes in demand caused by fluctuations in interest and
currency exchange rates may affect the Company's international sales. The
Company makes most of its international sales, however, through its affiliated
distributors. Metron's sales of the Company and other companies' products are
denominated in U.S. dollars, but its expenses are generally denominated in
foreign currencies. Accordingly, fluctuations in interest and currency exchange
rates may affect Metron's financial results. m-FSI's sales are denominated in
yen. As a result, U.S. dollar/yen exchange rates may affect the Company's equity
interest in m-FSI's earnings.

Metron and m-FSI sometimes engage in so-called "hedging" or risk-reducing
transactions to try to limit the negative effects that the devaluation of
foreign currencies relative to the U.S. dollar could have on operating results.
Metron and m-FSI will do so if a sale denominated in a foreign currency is
sufficiently large to justify the costs of hedging. To hedge a sale, Metron or
m-FSI will typically commit to buy U.S. dollars and sell the foreign currency at
a given price at a future date. If the customer cancels the sale, Metron or
m-FSI may be forced to buy U.S. dollars and sell the foreign currency at market
rates to meet its hedging obligations and may incur a loss in doing so. To date,
the hedging activities of Metron and m-FSI have not had any significant negative
effect on the Company.

THE COMPANY'S RESULTS ARE AFFECTED BY WEAKNESS IN FOREIGN MARKETS AND THE
IMPOSITION OF INTERNATIONAL-TRADING REGULATIONS

The Company and its affiliates operate in a global market. In fiscal 1998, 1997
and 1996 approximately 41%, 36% and 35%, respectively, of the Company's sales
revenue for all operations was derived from sales outside the United States.
These percentages include sales through Metron and m-FSI, which accounted for
89% of international sales in 1998, 82% in 1997, and 71% in 1996. The Company
expects that international sales will continue to represent a significant
portion of total sales. Sales to customers outside the United States involve a
number of risks, including the following:


                                       20

<PAGE>   21

-    Imposition of government controls
-    Compliance with U.S. export laws and foreign laws
-    Political and economic instability
-    Trade restrictions
-    Changes in taxes and tariffs
-    Longer payment cycles
-    Difficulty of administering business overseas
-    General economic conditions

In particular, the Japanese and Asian-Pacific markets are extremely competitive.
The semiconductor device manufacturers located there are very aggressive in
seeking price concessions from suppliers, including equipment manufacturers. In
fiscal 1998, approximately 37% of the Company's international sales for all
operations were attributable to these markets. Total sales to these markets have
declined from $54 million in fiscal 1996 to $34 million in fiscal 1998.

The Company seeks to meet technical standards imposed by foreign regulatory
bodies. However, the Company cannot guarantee that it will be able to comply
with those standards in the future. Any failure by the Company to design
products to comply with foreign standards could have a significant negative
impact on the Company.

LITIGATION MAY ADVERSELY IMPACT THE COMPANY'S OPERATIONS

The Company settled a patent infringement lawsuit in fiscal 1998. The Company
could in the future become involved in additional litigation or be the subject
of patent infringement inquiries. There can be no assurance about the outcome of
any future litigation or patent infringement inquiries and whether it will
adversely impact the Company's business or results of operations.

In the normal course of business, the Company from time to time becomes involved
in litigation that may ultimately result in a liability to the Company. It is
the opinion of management that facts known at the present time do not indicate
that there is a probability that any such litigation would have a material
effect on the Company's operations or its financial position. As of May 29,
1999, the Company believes it is not involved in any litigation that will have a
material impact on the Company.

The Company has previously announced a proposed acquisition with YieldUP.
YieldUP is currently involved in patent infringement litigation with CFMT, Inc.
and CFM Technologies, Inc.

Patent litigation can be costly and involve a significant amount of management
time and attention. Assuming successful completion of the acquisition of
YieldUP, there can be no assurance about the outcome of such litigation and
whether it will adversely impact the Company's business or results of operation.

IT MAY BE DIFFICULT FOR THE COMPANY TO COMPETE WITH STRONGER COMPETITORS

The microelectronics processing equipment industry is highly competitive. The
Company faces substantial competition throughout the world. The Company believes
that to remain competitive, it will require significant financial resources to
offer a broad range of products, to maintain customer service and support
centers worldwide, and to invest in product and process research and
development. The Company believes that the microelectronics industry is becoming
increasingly dominated by large manufacturers that have the resources to support
customers on a worldwide basis. Certain of the Company's competitors have
substantially greater financial, marketing, and customer service and support
capabilities than the Company. There is the possibility of large equipment
companies entering the market areas in which the Company competes. In addition,
there are smaller emerging microelectronics equipment companies that provide
innovative technology. The Company expects its competitors to continue to
improve the design and performance of their current products and processes and
to introduce new products and processes with improved price and performance
characteristics. No assurance can be given that the Company will continue to
compete successfully in the United States or elsewhere.


                                       21

<PAGE>   22

THE COMPANY MAY LOSE ITS KEY CUSTOMERS

Although the composition of the Company's largest customers has changed from
year to year, direct sales to the Company's top five customers in each of fiscal
1998, 1997 and 1996 have accounted for approximately 40%, 40% and 41%,
respectively, of the Company's total sales for all operations. Direct sales to
the Company's top two customers in each of fiscal 1998, 1997, and 1996 accounted
for approximately 20%, 25% and 23%, respectively, of the Company's total sales
for all operations. The Company currently has no long-term sales commitments
with any of its customers and sales are generally made pursuant to purchase
orders. A reduction, delay or cancellation of orders from one or more of its
significant customers, or the loss of one or more of such customers, could have
a material adverse effect on the Company's operating results.

INDUSTRY CONSOLIDATION MAY IMPACT THE COMPANY'S ABILITY TO COMPETE

There has been a trend toward industry consolidation for several years. The
Company expects this trend toward industry consolidation to continue as
companies attempt to strengthen or hold their market positions in a rapidly
changing industry. The Company believes that the industry consolidation may
result in competitors that are better able to compete. This could have a
material adverse affect on the Company's business operating results and
financial condition.

FUTURE ACQUISITIONS COULD ADVERSELY IMPACT THE COMPANY'S OPERATIONS AND
FINANCIAL CONDITION

A portion of the Company's historical growth has been from acquisitions. Through
the proposed acquisition of YieldUP and in the future the Company may pursue
additional acquisitions of product lines, technologies or businesses. Such
acquisitions by the Company may result in potentially dilutive issuance of
equity securities, incurrence of debt and amortization expenses related to
goodwill and other intangible assets, which could materially adversely affect
the Company's financial conditions and results of operations. In addition,
acquisitions such as the proposed acquisition of YieldUP, involve numerous
risks, including difficulties in the assimilation of the operations,
technologies and products of the acquired company, the diversion of management's
attention from other business concerns, risks of entering markets in which the
Company has no or limited direct prior experience, and the potential loss of key
employees of the acquired company. In the event that the proposed YieldUP
acquisition or any future acquisition does occur, there can be no assurance to
the effect thereof on the Company's business, financial condition or operating
results.

THE COMPANY MAY LOSE ITS KEY PERSONNEL

The Company's success depends to a significant extent upon management and
technical personnel. The loss of the services of several or more of these key
persons could have an adverse effect on the Company's operations. Competition
for such personnel in the Company's industry in all geographic locations is
high. There can be no assurance that the Company will continue to be successful
in attracting and retaining the personnel it requires to continue to grow and
operate profitably.

LOSS OF INTELLECTUAL PROPERTY RIGHTS COULD ADVERSELY AFFECT THE COMPANY'S
BUSINESS

Although the Company attempts to protect its intellectual property rights
through patents, copyrights, trade secrets and other measures, it believes that
its financial performance will depend more upon the innovation, technological
expertise and marketing abilities of its employees than upon such protection.
There can be no assurance that any of the Company's pending patent applications
will be issued or that foreign intellectual property laws will protect the
Company's intellectual property rights. There can be no assurance that any
patent issued to the Company will not be challenged, invalidated or circumvented
or that the rights granted thereunder will provide competitive advantages to the
Company. Furthermore, there can be no assurance that others will not
independently develop similar products duplicate the Company's products or, if
patents are issued to the Company, design around the patents issued to the
Company.


                                       22

<PAGE>   23

As is typical in the semiconductor industry, the Company occasionally receives
notices from third parties alleging infringement claims. Although there are
currently no pending lawsuits against the Company regarding any possible
infringement claims, there can be no assurance that infringement claims by third
parties or claims for indemnification resulting from infringement claims will
not be asserted or that such assertions, if proven to have merit, will not
materially adversely affect the Company's business, financial condition and
results of operations. If any such claims are asserted against the Company, the
Company may seek to obtain a license under the third party's intellectual
property rights if available on reasonable terms or at all. The Company could
decide, in the alternative, to resort to litigation to challenge such claims or
enforce its proprietary rights. Such challenges could be extremely expensive and
time consuming and could materially adversely affect the Company's business,
financial condition and results of operations.

THE COMPANY MAY NOT REALIZE ITS DEFERRED TAX ASSETS

As of May 29, 1999 the Company had recorded net deferred tax assets of
approximately $10.1 million. Based on an assessment of the Company's taxable
earnings' history and prospective future taxable income, as well as tax planning
strategies available to management, which includes the sale or disposal of
assets to produce current taxable income, management has determined it to be
more likely than not that its net deferred tax asset will be realized in future
periods. This amount is expected to be recoverable upon the completion of the
divestiture of the Chemical Management division. The Company may be required to
provide a valuation allowance for this asset in the future if the transaction
does not occur. The recording of a valuation allowance would have a negative
impact on the Company's reported results of operations.

YEAR 2000 COMPLIANCE AND POTENTIAL IMPACT ON THE COMPANY'S BUSINESS

The Company is addressing the issues associated with date-related data and the
programming code in existing computer systems as the millennium (Year 2000)
approaches. The "Year 2000" problem is pervasive and complex as virtually every
computer operation will be affected in some way. The Company is aware of the
computing difficulties that the millennium issue presents for the Year 2000.

The Company has identified teams to address the information technology (IT)
systems used for internal purposes at the Company and to also address the non-IT
systems used by the Company. Each of the Company's divisions have also
identified teams to address the potential software and hardware issues
associated with the division's individual product lines.

It is anticipated that all reprogramming and Year 2000 testing efforts for
internally used IT systems will be complete by September 1, 1999, allowing time
for testing.* The non-IT systems generally require third-party assurances as to
compliance with Year 2000. To date, confirmations have not been received from
all of the Company's vendors indicating that plans are being developed to
address processing of transactions in the Year 2000. Availability of resources,
unexpected delays as well as coding issues may impact the Company's ability to
complete the reprogramming by September 1, 1999 or of our vendors ability to
become Year 2000 compliant.* There can be no assurance that the Company will not
experience serious unanticipated negative consequences and/or material costs
caused by undetected errors or defects in the technology used in its internal
operating systems, which are composed predominantly of third party software and
hardware technology or by the inability of vendors to correct their Year 2000
issues.

In the worst case, the Company or the third parties on which it depends may, for
an extended period of time, be incapable of conducting critical business
activities, such as manufacturing and shipping products and invoicing customers.
In addition, if public suppliers of water, electricity, or natural gas are
disrupted for a substantial period, the Company's operations may be materially
adversely affected.

Each of the business segments have completed the analysis of each of their
product lines to determine if hardware and software are Year 2000 compliant and
if necessary, determined and began the implementation of the


                                       23
<PAGE>   24

appropriate fixes. The Company's current standard product lines are believed to
be Year 2000 compliant. The Company is working with their customers to schedule
appropriate upgrades and necessary servicing of products.

There can be no assurance that the Company's current products do not contain
undetected errors or defects associated with Year 2000 date functions that may
result in material costs to the Company, including repair and replacement costs
and costs incurred in litigation due to any such defects. Many commentators have
stated that a significant amount of litigation will arise out of Year 2000
compliance issues. Because of the unprecedented nature of such litigation, and
the Company's current lack of knowledge as to whether its products are Year 2000
complaint, there can be no assurance that the Company will not be materially
adversely affected by claims related to Year 2000 compliance.

The Company, for both continuing and discontinuing operations, incurred
approximately $400,000 to address the Year 2000 problem during fiscal 1998 and
expects to incur approximately $980,000 in fiscal 1999 of which $620,000 has
been spent through May 29, 1999.*

The Company is in the process of establishing a contingency plan if the
Company's IT and non-IT systems are not Year 2000 compliant. It is anticipated
that the contingency plan will be completed by September 1999.*

ADOPTION OF THE COMMON EUROPEAN CURRENCY MAY ADVERSELY AFFECT THE COMPANY AND
ITS AFFILIATED DISTRIBUTORS

The Company is in the process of analyzing the issues raised by the introduction
of the common European currency unit, the "Euro." The use of the Euro began on
January 1, 1999 and will be phased-in through January 1, 2002. The Company does
not expect the cost of any necessary systems modification to be material and
does not anticipate that the introduction and use of the Euro will materially
affect the results of its or its affiliated distributors' international business
operations. Nor does the Company expect the Euro to have a material effect on
the currency exchange risks of its or its affiliated distributors' business. The
Company's management will continue to monitor the effect of the implementation
of the Euro.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

MARKET RISKS

The Company's market risk exposure includes interest rate risk related to its
cash and cash equivalents and investments in marketable securities. The Company
has investment guidelines, which limit the types of securities in which it may
invest as well as the length of maturities. No investment will have a maturity
date in excess of eighteen months.

The table below provides information about the Company's cash and cash
equivalents and marketable securities as of May 29, 1999.

<TABLE>
<CAPTION>
                                                                               Cost                 Fair Value
                                                                         -----------------      ------------------
<S>                                                                      <C>                    <C>
         Due within one year                                                  $63,918,143             $63,876,351

         Due after one year and less than two years                            15,860,022              15,760,264
                                                                         ----------------       -----------------

                                                                              $79,778,165             $79,636,615
                                                                         ================       =================
</TABLE>


The Company is also exposed to certain market risks based on outstanding debt
obligations of $42 million as of May 29, 1999. The fixed interest rates of these
debt obligations range from 7.15% to 7.27% and have maturity dates through
December 2006. The Company does not have investments in derivative financial
instruments.


                                       24
<PAGE>   25

                    FSI INTERNATIONAL, INC. AND SUBSIDIARIES


PART II.  OTHER INFORMATION

ITEM 1.   LEGAL PROCEEDINGS

The Company generates minor amounts of liquid and solid hazardous waste and uses
licensed haulers and disposal facilities to ship and dispose of such waste. The
Company has received notice from state or federal enforcement agencies that it
is a potentially responsible party ("PRP") in connection with the investigation
of several hazardous waste disposal sites owned and operated by third parties.
In each matter, the Company believes that it is at most a "de minimis" RPR. The
Company has elected to participate in settlement offers made to all de minimis
parties with respect to several of such sites. The risk of being named a PRP is
that if any of the other PRP's are unable to contribute their proportionate
share of the liability, if any, associated with the site, those PRP that are
able could be held financially responsible for the shortfall. While the ultimate
outcome of those matters not yet settled cannot presently be determined, the
Company does not believe that any of these investigations, either individually
or in the aggregate, will have a material adverse effect on its business,
operating results, or financial condition.

There has been substantial litigation regarding patent and other intellectual
property rights in the microelectronics industry recently and further
commercialization of the Company's products could provoke claims of infringement
by third-parties. In the future, litigation may be necessary to enforce patents
issued to the Company, to protect trade secrets or know-how owned by the Company
or to defend the Company against claimed infringement of the rights of others
and to determine the scope and validity of the Company's proprietary rights. Any
such litigation could result in substantial costs and diversion of effort by the
Company, which by itself could have a material adverse impact on the Company's
financial condition and operating results. Further, adverse determinations in
such litigation could result in the Company's loss of proprietary rights,
subject the Company to significant liabilities to third parties, require the
Company to seek licenses from third-parties or prevent the Company from
manufacturing or selling one or more products, any of which could have a
material adverse effect on the Company's financial condition and results of
operations.

In October 1996, Eric C. and Angie L. Hsu (the "plaintiffs") filed a lawsuit in
the Superior Court of California, County of Alameda, Southern Division, against
Semiconductors Systems, Inc. ("Semiconductor Systems"), a wholly-owned
subsidiary of the Company that was acquired in April 1996, and the former
shareholders of Semiconductor Systems. In the fall of 1995, pursuant to the
Employee Stock Purchase and Shareholder Agreement dated November 30, 1990
between Mr. Hsu and Semiconductor Systems (the "Shareholder Agreement") and in
connection with Mr. Hsu's termination of his employment with Semiconductor
Systems in August 1995, the former shareholders of Semiconductor Systems
purchased the shares of Semiconductor Systems common stock then held by Mr. Hsu.
The plaintiffs are claiming, among other things, that such purchase breached the
Shareholder Agreement and violated the California Corporations Code, breached
the fiduciary duty owed plaintiffs by the individual defendants and constituted
fraud. The plaintiffs are seeking, among other things, damages in an amount to
be proven at trial, punitive damages, attorneys' fees and a constructive trust
over the shares held in the escrow mentioned below. The amount of damages sought
by the plaintiffs is currently approximately $2.4 million, together with such
other damages as the trial court may allow. Semiconductor Systems intends to
vigorously defend the lawsuit and the Company currently believes the trial will
commence later this year.

The Company, on behalf of Semiconductor Systems, has made a claim with respect
to the lawsuit under the escrow created at the time of the Company's acquisition
of Semiconductor Systems. The escrow was established to secure certain
indemnification obligations of the former shareholders of Semiconductor Systems.
The former shareholders have agreed to hold the Company and Semiconductor
Systems harmless from any claim arising out of any securities transactions
between the shareholders or former shareholders of Semiconductor Systems and
Semiconductor Systems. The escrow consists of an aggregate of 250,000 shares of
Company Common Stock paid to the former shareholders of Semiconductor Systems as
consideration in the acquisition.


                                       25
<PAGE>   26

Other than the litigation described above or routine litigation incidental to
the Company's business, there is no material litigation to which the Company is
a party or of which any of its property is subject.

ITEM 2. CHANGE IN SECURITIES

        NONE

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

        NONE

ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

        NONE

ITEM 5. OTHER INFORMATION

        NONE











                                       26
<PAGE>   27

                    FSI INTERNATIONAL, INC. AND SUBSIDIARIES


ITEM 6   EXHIBITS AND REPORTS ON FORM 8-K

(a)(3) Exhibits

    * An asterisk next to a listed Exhibit indicates it is an executive
compensation plan or arrangement.

     2.0  Agreement and Plan of Reorganization, dated as of January 21, 1999
          among FSI International, Inc., BMI International, Inc. and YieldUP
          International, Corporation. (15)
     2.1  License Agreement for Microelectronic Technology between YieldUP
          International, Corporation and FSI International, Inc. dated January
          21, 1999. (15)
     2.2  Agreement and Plan of Reorganization by and Among FSI International,
          Inc., Spectre Acquisition Corp., and Semiconductor Systems, Inc. (1)
     2.3  Asset Purchase Agreement dated as of June 9, 1999 between FSI
          International, Inc. and The BOC Group, Inc. (16)
     3.1  Restated Articles of Incorporation of the Company. (2)
     3.2  Restated By-Laws. (3)
     3.3  Amendment to Restated By-Laws. (4)
     4.1  Note Purchase Agreement between FSI International, Inc. and
          Metropolitan Life Insurance Company and other certain purchasers.
          (Schedule A omitted) (5)
     4.2  Form of Rights Agreement dated as of May 22, 1997 between FSI
          International, Inc. and Harris Trust and Savings Bank, National
          Association, as Rights Agent. (6)
     4.3  Amendment dated March 26, 1998 to Rights Agreement dated May 22, 1997
          by and between FSI International, Inc. and Harris Trust and Saving
          Bank, National Association as Rights Agent. (7)
    *10.1 FSI International, Inc. 1997 Omnibus Stock Plan. (5)
    *10.2 Split Dollar Insurance Agreement and Collateral Assignment Agreement
          dated December 28, 1989, between the Company and Joel A. Elftmann.
          (Similar agreements between the Company and each of Dale A. Courtney,
          Patricia M. Hollister, Luke R. Komarek, Benno G. Sand and Benjamin J.
          Sloan, have been omitted, but will be filed if requested in writing by
          the Commission).(8)
     10.3 Lease dated June 27, 1985, between the Company and Lake Hazeltine
          Properties. (3)
     10.4 Lease dated September 1, 1985, between the Company and Elftmann,
          Wyers, Blackwood Partnership. (3)
     10.5 Lease dated September 1, 1985, between the Company and Elftmann, Wyers
          Partnership. (3)
    *10.6 1989 Stock Option Plan. (4)
    *10.7 Amended and Restated Employees Stock Purchase Plan. (14)
     10.8 Shareholders Agreement among FSI International, Inc. and Mitsui & Co.,
          Ltd. and Chlorine Engineers Corp. Ltd. dated as of August 14, 1991.
          (8)
     10.9 FSI Exclusive Distributorship Agreement dated as of August 14, 1991
          between FSI International, Inc. and m-FSI, Ltd. (8)
    10.10 FSI Licensing Agreement dated as of August 14, 1991, between FSI
          International, Inc. and m-FSI, Ltd. (8)
    10.11 License Agreement, dated October 15, 1991, between the Company and
          Texas Instruments Incorporated. (9)
    10.12 Amendment No. 1, dated April 10, 1992, to the License Agreement,
          dated October 15, 1991, between the Company and Texas Instruments
          Incorporated. (9)
    10.13 Amendment effective October 1, 1993 to the License Agreement, dated
          October 15, 1991 between the Company and Texas Instruments
          Incorporated. (10)
   *10.14 Amended and Restated Directors' Nonstatutory Stock Option Plan. (11)
   *10.15 Management Agreement between FSI International, Inc. and Joel A.
          Elftmann, effective as of June 5, 1998 (Similar agreements between the
          Company and its executive officers have been omitted but will be filed
          if requested in writing by the Commission. (14)
   *10.16 FSI International, Inc. 1994 Omnibus Stock Plan. (12)


                                       27
<PAGE>   28


   *10.17 FSI International, Inc. 1998 Incentive Plan. (14)
    10.18 First Amendment to Lease made and entered into October 31, 1995 by
          and between Lake Hazeltine Properties and FSI International, Inc. (13)
    10.19 Distribution Agreement made and entered into as of March 31, 1998 by
          and between FSI International, Inc. and Metron Technology B.V.
          (Exhibits to Agreement omitted). (14)
    10.20 Lease dated August 9, 1995 between Skyline Builders, Inc. and FSI
          International, Inc. (13)
    10.21 Lease Rider dated August 9, 1995 between Skyline Builders, Inc. and
          FSI International, Inc. (13)
    10.29 Lease Amendment dated November, 1995 between Roland A. Stinski and
          FSI International, Inc. (Exhibits to Amendment omitted). (13)
     27.0 Financial Data Schedule. (filed herewith)



(1)  Filed as an Exhibit to the Company's Registration Statement on Form S-4 (as
     amended) dated March 21, 1996, SEC File No. 333-1509 and incorporated by
     reference.
(2)  Filed as an Exhibit to the Company's Report on Form 10-Q for the quarter
     ended February 24, 1990, SEC File No. 0-17276, and incorporated by
     reference.
(3)  Filed as an Exhibit to the Company's Registration Statement on Form S-1,
     SEC File No. 33-25035, and incorporated by reference.
(4)  Filed as an Exhibit to the Company's Report on Form 10-K for the fiscal
     year ended August 26, 1989, SEC File No. 0-17276, and incorporated by
     reference.
(5)  Filed as an Exhibit to the Company's Report on Form 10-Q for the fiscal
     quarter ended March 1, 1997, SEC File No. 0-17276, and incorporated by
     reference.
(6)  Filed as an Exhibit to the Company's Report on Form 8-K, filed by the
     Company on June 5, 1997, SEC File No. 0-17276, and incorporated by
     reference.
(7)  Filed as an Exhibit to the Company's Report on Form 8-A/A-1, filed by the
     Company on April 16, 1998, Sec File No. 0-17276 and incorporated by
     reference.
(8)  Filed as an Exhibit to the Company's Report on Form 10-K for the fiscal
     year ended August 31, 1991, as amended by Form 8 dated January 7, 1992, SEC
     File No. 0-17276, and incorporated by reference.
(9)  Filed as an Exhibit to the Company's Report on Form 10-K for the fiscal
     year ended August 29, 1992, File No. 0-17276, and incorporated by
     reference.
(10) Filed as an Exhibit to the Company's Report on Form 10-K for the fiscal
     year ended August 28, 1993, SEC File No. 0-17276, and incorporated by
     reference.
(11) Filed as an Exhibit to the Company's Report on Form 10-Q for the fiscal
     quarter ended May 28, 1994, SEC File No. 0-17276, and incorporated by
     reference.
(12) Filed as an Exhibit to the Company's Report on Form 10-K for the fiscal
     year ended August 27, 1994, SEC File No. 0-17276, and incorporated by
     reference.
(13) Filed as an Exhibit to the Company's Report on Form 10-K for the fiscal
     year ended August 26, 1995, SEC File No. 0-17276 and incorporated by
     reference.
(14) Filed as an Exhibit to the Company's Report on Form 10-K for the fiscal
     year ended August 29, 1998, SEC File No. 0-17276, and incorporated by
     reference.
(15) Filed as an Exhibit to the Company's Report on Form 8-K, filed by the
     Company on January 21, 1999, SEC File No. 0-17276 and incorporated by
     reference.
(16) Filed as an Exhibit to the Company's Report on Form 8-K, filed by the
     Company on June 23, 1999, SEC File No. 0-17276 and incorporated by
     reference.
 ---------------------------

(b)  Reports on Form 8-K

     The Company filed an 8-K dated June 23, 1999 with respect to the proposed
     Chemical Management division divestiture.





                                       28
<PAGE>   29

                    FSI INTERNATIONAL, INC. AND SUBSIDIARIES








SIGNATURE

Pursuant to the requirements 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.



                                             FSI INTERNATIONAL, INC.
                                             . . . . . . . . . . . . . . . .


                                                  [Registrant]


DATE:  July 13, 1999



                                             By:     /s/ Patricia M. Hollister
                                                     ---------------------------
                                                     Patricia M. Hollister
                                                     Chief Financial Officer
                                                     and Corporate Controller
                                                     on behalf of the
                                                     Registrant and as
                                                     Principal Financial Officer




                                       29