<PAGE>   1

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

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

                                   FORM 10-K
                            ------------------------

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

                    FOR THE FISCAL YEAR ENDED MARCH 31, 1999

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

                         COMMISSION FILE NUMBER 026240

                         ALIGN-RITE INTERNATIONAL, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S>                                            <C>
                 CALIFORNIA                                      954528353
       (STATE OF OTHER JURISDICTION OF                       (I.R.S. EMPLOYER
       INCORPORATION OR ORGANIZATION)                       IDENTIFICATION NO.)
</TABLE>

                     2428 ONTARIO STREET, BURBANK, CA 91504
              (ADDRESS OF PRINCIPAL EXECUTIVE OFFICER) (ZIP CODE)

       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (818) 843-7220

        SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None

 SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock, $.01
                                   par value

     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.  Yes [X]  No [ ]

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  Yes [X]  No [ ]

     As of May 28, 1999, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was approximately $58,542,354 based upon the
average bid and ask prices of the Common Stock as reported on the Nasdaq
National Market on such date. Shares of Common Stock held by officers, directors
and holders of more than ten percent of the outstanding Common Stock have been
excluded from this calculation because such persons may be deemed to be
affiliates. The determination of affiliate status is not necessarily a
conclusive determination for other purposes.

     As of May 28, 1999, the Registrant had outstanding 4,546,979 shares of
Common Stock.

                      DOCUMENTS INCORPORATED BY REFERENCE:

     Portions of the registrant's definitive proxy statement, which will be
filed with the Securities and Exchange Commission within 120 days after March
31, 1999 are incorporated by reference under Part III.

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<PAGE>   2

                               TABLE OF CONTENTS

                            ITEM NUMBER AND CAPTION

<TABLE>
<CAPTION>
                                                                    PAGE
                                                                   NUMBER
                                                                   ------
<C>  <S>                                                           <C>
                                 PART I
 1.  Business....................................................     3
 2.  Properties..................................................     7
 3.  Legal Proceedings...........................................     7
 4.  Submission of Matters to a Vote of Security Holders.........     8

                                 PART II
 5.  Market for the Registrant's Common Equity and Related
     Shareholder Matters.........................................     9
 6.  Selected Financial Data.....................................    10
 7.  Management's Discussion and Analysis of Financial Condition
     and Results of Operations...................................    11
7A.  Quantitative and Qualitative Disclosures About Market
     Risk........................................................    16
 8.  Financial Statements and Supplementary Data.................    17
 9.  Changes in and Disagreements with Auditors on Accounting and
     Financial Disclosure........................................    38

                                PART III
10.  Directors and Executive Officers of the Registrant..........    38
11.  Executive Compensation and Related Matters..................    38
12.  Security Ownership of Certain Beneficial Owners and
     Management..................................................    38
13.  Certain Relationships and Related Transactions..............    38

                                 PART IV
14.  Exhibits, Financial Statement Schedules and Reports on Form
     8K..........................................................    38
</TABLE>

                                        2
<PAGE>   3

                                     PART I

ITEM 1. BUSINESS

GENERAL

     Align-Rite International Inc., a California corporation ("ARII") together
with its wholly-owned subsidiaries, the ("Company"), manufactures and markets
quality photomasks for the global semiconductor industry. Photomasks are
required for the manufacture of virtually all integrated circuits, which are
essential components in consumer and industrial electronic products. Photomasks
are precision photographic quartz or glass plates containing microscopic images
of integrated circuits. The Company images integrated circuit patterns onto
photomasks using electron beam, laser beam and optical microlithography methods
at its manufacturing facilities in Burbank, California, Bridgend, Wales and
Heilbronn, Germany.

     The Company is comprised of ARII, incorporated on April 27, 1995, and its
wholly-owned subsidiaries Align-Rite International Limited ("ARI"), Align-Rite
Corporation ("ARC"), Align-Rite Limited ("ARL"), Align-Rite B.V. ("ARBV"), and
Align-Rite GmbH ("ARGmbH"). ARII and its subsidiaries are collectively referred
to herein as the "Company". All significant intercompany accounts and
transactions have been eliminated.

     ARII, ARI and ARBV are primarily holding companies into which their
respective subsidiaries are consolidated. On July 21, 1995, ARII completed an
initial public offering of Common Stock, as part of which all of the outstanding
Ordinary Shares of ARI were exchanged for the Common Stock of ARII.

     The Company's principle executive offices are located at 2428 Ontario
Street, Burbank, California, 91504. The Company's telephone number is (818)
843-7220.

INDUSTRY OVERVIEW

     Photomasks are a key element in the manufacture of semiconductors.
Photomasks are used as master images to transfer integrated circuit patterns
onto semiconductor wafers during the fabrication of integrated circuits and, to
a lesser extent, other types of electronic components, such as thin film
magnetic recording heads, advanced printed circuit boards and flat panel
displays. Each circuit design normally consists of a series of eight to
twenty-five separate circuit patterns, each of which is imaged onto a separate
photomask. The completed series of photomasks are then used to successively
image each separate circuit pattern onto a single semiconductor wafer.

     Photomasks are primarily manufactured by independent manufacturers, with
some production by captive manufacturers. Captive manufacturers are considered
the internal photomask manufacturing operations of semiconductor businesses
which produce photomasks almost exclusively for their own use in the fabrication
of integrated circuits. Since 1987, there has been an industry trend to divest
or close captive photomask operations of semiconductor manufacturers in the
United States and Europe. The Company believes this trend is attributable to:
(i) substantial ongoing capital investment requirements; (ii) significant
operating and maintenance costs; (iii) the presence of reliable, independent
manufacturers of photomasks in the United States and Europe; and (iv) a trend by
semiconductor manufacturers to focus on the core components of their businesses.
As a result, the Company believes that the share of the market served by
independent manufacturers of photomasks has successively increased each year
since 1987.

     The purchasers of photomasks consist primarily of semiconductor
manufacturers and integrated circuit design businesses in the United States,
Europe and the Pacific Rim. The semiconductor industry has been in a downturn
for the last eighteen months, but despite this applications for integrated
circuits such as cellular telephones, pagers, automotive control systems,
medical products, computers and printers, electronically controlled industrial
equipment, satellites, security systems and consumer appliances have continued
to proliferate. The demand for Photomasks is driven largely by increases in the
number of semiconductor designs and the complexity of integrated circuits.
According to VLSI Research, the worldwide demand for

                                        3
<PAGE>   4

photomasks will exceed $2.0 billion in 1999 with growing demand in both units
and dollars forecast for the next three years at a CAGR in excess of 15%.

     The number of significant independent photomask manufacturers (companies
with estimated annual photomask sales in excess of $5.0 million) in the United
States and Europe has decreased as a result of industry consolidation, closing
of operations and competitive pressures on photomask manufacturers. These
competitive pressures were mainly the result of the implementation of
sophisticated software programs used to reduce errors in integrated circuit
design, which had the effect of reducing the number of photomask iterations
normally required to create a working integrated circuit, as well as shortening
photomask delivery cycles. The shortened photomask delivery cycles also reduced
the need for backup photomask sets.

     The Company believes that the following trends are increasing the demand
for photomasks and the photomask industry's importance in the semiconductor
manufacturing process:

     Customization of Semiconductor Designs. Growing demand for semiconductors,
including application specific integrated circuits (ASICs), application specific
standard products (ASPs), embedded microcontrollers and a growing variety of
memory products, has generated increasing demand for photomasks as each new type
of semiconductor device requires additional new and often more advanced
photomasks.

     Increasing Device Complexity. As the complexity of semiconductor devices
has increased in response to continued efforts to improve the performance and
functionality of these devices through greater transistor densities and smaller
feature sizes, the number of successive layers of patterns required to
manufacture an integrated circuit has increased, resulting in an increase in the
number of photomasks used to manufacture to microprocessors in 1991 was 14 as
compared to 25 photomasks now required for the most advanced generation of
microprocessors.

     Decreasing Size of Semiconductor Designs. The semiconductor industry's
growth is driven by its ability to produce smaller and more powerful
semiconductor chips at lower costs. As semiconductor line widths become as small
as the wavelength of the illumination sources in optical lithography, the
semiconductor manufacturing process becomes increasingly dependent upon high
precision photomasks to deliver process results to more demanding specifications
and tolerances. Future generations of wafer lithography equipment are expected
to increase the need for high precision photomasks, thereby further increasing
demand for advanced photomasks with tighter specifications. Development of
increasingly small design features is likely to generate increased demand for
advanced photomasks that can accurately and reliably replicate intricate design
features.

     Proliferation of Semiconductor Applications. Semiconductor devices of all
types are continuing to proliferate into new products, including cellular
telephones, pagers, automobiles, medical products, household appliances and
other consumer electronic products. In addition, the demand for semiconductor
devices from traditional markets such as personal computers is growing
significantly as semiconductor content in electronic systems increases and as
personal computers expand further into homes and other new market segments. The
Company believes that the proliferation of semiconductor applications will leads
to an increase in semiconductor design activity and resulting demand for
photomasks.

     The Company believes that all of these changes in the semiconductor
industry are increasing the demand for photomasks and increasing the already
important role of photomasks in the semiconductor manufacturing process.

SALES AND MARKETING

     Because each photomask is unique, the Company works closely with each
customer to define and communicate precisely the specification required by the
customer. The Company endeavors to develop long-term customer relationships
primarily with semiconductor manufacturers and other electronics companies whose
annual independent photomask expenditures range from $250,000 to $10,000,000. An
important market segment for the Company is custom integrated circuit
manufacturers, as they typically require a higher volume of photomasks and use
integrated circuit pattern sizes, which are now, and are expected to remain for
several years, within the Company's current technological capabilities. In
addition, the Company focuses its marketing efforts on analog, linear and mixed
signal integrated circuit manufacturers, and to a lesser degree
                                        4
<PAGE>   5

with manufacturers of other electronic components such as thin-film magnetic
recording heads and advanced printed circuit boards. The Company believes these
segments, which require a substantial volume of photomasks, represent growing
markets within the semiconductor and electronics industry.

     The Company targets various aspects of customer businesses including second
sourcing opportunities. Second sourcing is the standard practice in the
semiconductor industry of maintaining at least two, and sometimes three, sources
for critical materials used in the manufacturing process, including photomasks.
Initially, the Company seeks to become a qualified supplier. After demonstrating
its reliability, the Company then pursues a greater percentage of the customer's
business.

     The Company also targets corporate outsourcing opportunities. These
opportunities are presented by: (i) semiconductor manufacturers which operate
captive photomask manufacturing operations and which outsource a portion of
their photomask requirements in order to have a reliable second source of
supplies, (ii) captive manufacturers which outsource during peak demand periods
rather than invest in additional manufacturing capacity; and (iii) semiconductor
manufacturers concentrating on the core components of their business which have
closed or reduced the scale of their internal photomask manufacturing
operations.

     The Company primarily conducts its strategic sales and marketing activities
at its facilities in Burbank, California, Bridgend, Wales, and in Heilbronn,
Germany. The Company maintains sales and technical service centers in
California, Arizona, Colorado, Connecticut, France and The Netherlands. The
Company may expand its international presence by opening additional sales and
technical service centers in other strategic international locations.

STRATEGIC ALLIANCE PARTNERS

     The Company has formed three (3) strategic alliances: 1.) Harris Advanced
Imaging Group, a captive photomask manufacturer located in Florida, 2.) Innova,
Inc. a photomask manufacturer in Hsinchu, Taiwan, and 3.) Telefunken
Microelectronic Group based in Heilbronn, Germany. These alliances allow each
partner to: (i) exploit economies of scale for raw material purchases through
the use of collective bargaining with photomask raw material suppliers; (ii)
provide additional manufacturing resources by allowing for mutual use of each
other's photomask manufacturing resources; (iii) share advancements in process
technology; and (iv) in the case of Innova, Inc., positions the Company to sell
its products into the Pacific Rim.

     The Company announced in May 1999 that it had signed a non-binding letter
of intent to purchase Harris Corporation's Imaging Technology Group (ITG)
semiconductor business unit, a photomask manufacturer located in Melbourne,
Florida. The acquisition is subject to a number of conditions, including the
preparation, negotiation and approval of a definitive agreement satisfactory
completion of due diligence obtaining required regulatory and other approvals,
and final agreement on the financial terms of the transaction.

PRODUCTS AND MANUFACTURING PROCESS

     Photomasks are manufactured by the Company in accordance with the
integrated circuit design patterns provided on a confidential basis by its
customers. These proprietary circuit design patterns are typically developed
using sophisticated computer-aided design systems. The final design of each
integrated circuit results in a series or set of precise individual circuit
patterns to be imaged onto a series of typically eight to twenty-five separate
photomasks. The series or set of patterned photomasks replicates the customer's
integrated circuit design. The photomasks are then used to successively image a
unique pattern from each photomask in the set onto a semiconductor wafer. This
imaging is typically accomplished on a wafer imaging system by transferring
light throughout the photomask onto a micron-thick photosensitive polymer or
"photoresist" that is spread over the surface of the semiconductor wafer.
Chemicals are then used to wash away either the light-exposed or the unexposed
areas of the photoresist on the wafer depending upon the needs of the
semiconductor manufacturer. The imaged integrated circuit pattern on the
photoresist is then transferred to the surface of the wafer by a chemical
etching process.

     The Company currently images photomasks using electron beam, laser beam,
and optical microlithography methods.

                                        5
<PAGE>   6

LASER BEAM IMAGING

     Laser beam photomask imaging systems typically utilize eight laser beams,
which simultaneously image the circuit design patterns onto a photomask. The
primary benefit of these systems is shorter imaging and processing times, and it
requires a less complex chemical process as compared to electron beam photomask
imaging systems. Laser beam photomask imaging systems permit photomask
manufacturers to address a segment of the market that frequently require
response times of approximately twenty-four hours or less between order
placement and shipment of the finished photomasks. The Company currently
operates three Core 2564 laser beam imaging systems, two in the United States
and one in Europe.

     The Company currently has one ETEC Alta 3500 System installed in Europe
with another system presently being installed in the U.S., which now give the
Company advanced lithography capability. These systems will allow the Company to
meet the challenging requirements for placement, critical dimension, butting and
alignment control imposed by .25 micron photomask production.

ELECTRON BEAM IMAGING

     When utilizing the electron beam photomask imaging process, the photomask
patterns are produced from the customer's integrated circuit design data
following the conversion of this data into compatible electron beam system
language. The electron beam photomask imaging system uses a single electron beam
scanning system to write the integrated circuit pattern onto the photomask in an
environmentally controlled vacuum chamber. The electron beam photomask imaging
process makes it possible to achieve extremely small patterns, finer line
resolution, and precise pattern size and pattern placement tolerances. The
Company currently operates seven electron beam photomask imaging systems, four
in the United States and three in Europe.

OPTICAL IMAGING

     In addition to electron beam and laser beam lithography manufacturing
methods, the Company uses, to a lesser degree, optical microlithography methods.
In the optical photomask imaging process, magnetic tapes containing the
integrated circuit design patterns are used to "drive" a microlithographic
imaging system, known as a pattern generator, which "writes" the pattern onto a
reticle using a columnated mercury exposure system. The reticle is typically a
single image of the integrated circuit pattern five times larger than the actual
size of the finished circuit. The reticle image is then photographically reduced
to the final size of the circuit and printed as many as several hundred times on
a master photomask by an optical photorepeater. The master photomask may be used
to project the circuit patterns onto semiconductor wafers or may be used to make
reprints which are used to contact print the circuit patterns onto the wafer.
Photomasks manufactured using optical processes are typically less expensive but
are also less precise and have lower resolution than electron beam or laser
imaged photomasks. The Company has a number of pattern generators and
photorepeaters at each of its manufacturing facilities.

MATERIALS AND SUPPLIES

     The raw materials utilized by the Company include photoblanks, which are
high precision quartz or glass plates, pellicles, which are transparent
cellulose membranes that protect the surface of the photomask, and electronic
grade chemicals which are used during the manufacturing process.

     The Company does not currently have long-term supply agreements with any of
its raw material suppliers. As a relatively small number of quality quartz or
glass producers exist, there can be no assurance that the Company will not
experience difficulties in the future in obtaining the timely or necessary
supply of raw materials. Any difficulty or delay in obtaining an adequate supply
of raw materials or any significant increase in the price of raw materials could
have a material adverse effect on the Company's operations. In addition,
fluctuations in foreign currency exchange rates could have a material adverse
effect on the price of raw materials purchased outside of the United States.

                                        6
<PAGE>   7

COMPETITION

     The photomask industry is highly competitive. In the United States, the
Company competes with Dupont Photomasks, Inc. ("DuPont") and Photronics, Inc.,
and to a lesser extent, with other significantly smaller independent
manufacturers. In Europe, the Company primarily competes with Compugraphics
International Limited, DuPont, and Photronics, Inc. The Company also competes,
to a lesser extent, with certain semiconductor companies who manufacture
photomasks primarily for their own internal needs.

     The Company's ability to compete primarily depends upon its technical
capabilities, the capacity of its manufacturing facilities, the consistency of
product quality, customer service and technical support, product pricing and the
timeliness of product delivery. The Company also believes that its proximity to
customers is an important competitive factor in certain market segments.

EMPLOYEES

     As of March 31, 1999, the Company employed approximately 171 people in the
United States and 123 in Europe on a full time basis. None of the Company's
employees except for its employees in Germany are currently represented by a
labor union. The Company's German subsidiary is subject to German law, which
binds it as a member of a selected industry group to agreements reached by
industry management and employee representatives. The Company believes that its
employee relations are good.

ITEM 2. PROPERTIES

     The Company's main executive, administrative and manufacturing offices are
located in a 33,000 square foot facility in Burbank, California under several
leases, all of which expire in the year 2000. The Company maintains the right to
renew these leases for additional five-year terms. In addition, the Company
currently operates its foreign operations from a 26,000 square foot facility,
located in Bridgend, Wales under a lease which expires in 2006 and a 15,000
square foot facility located in Heilbronn, Germany which expires in 2007.

     The Company also has approximately 20,000 square feet of office space under
various leases and rental agreements in multiple locations throughout the United
States and Europe in support of its sales force and technical support staff.

     The Company believes that its existing and planned facility additions are
adequate for its current and short-term manufacturing needs. The Company also
believes additional space would be readily available at commercially reasonable
terms, should the Company find a need to expand its operations.

ITEM 3. LEGAL PROCEEDINGS

     The Company is not currently a party to any legal proceedings the adverse
outcome of which would have a material adverse effect on the financial condition
or results of operations of the Company.

                                        7
<PAGE>   8

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

     None.

EXECUTIVE OFFICERS OF THE REGISTRANT

     The executive officers of the Company as of March 31, 1999 are as follows:

<TABLE>
<CAPTION>
          NAME            AGE                             POSITION
          ----            ---                             --------
<S>                       <C>   <C>
James L. Mac Donald.....  52    Chairman of the Board, President and Chief Executive Officer
Petar N. Katurich.......  36    Vice President of Finance, Chief Financial Officer, and
                                Secretary
</TABLE>

     JAMES L. MAC DONALD founded the Company in 1970 and since then has served
as its Chairman of the Board, President and Chief Executive Officer. Mr. Mac
Donald is a Director of the British American Chamber of Commerce and a Fellow of
the Institute of Directors.

     PETAR N. KATURICH has served as Chief Financial Officer of the Company
since October 1992 and Vice President of Finance since April 1998. From 1991 to
1992, Mr. Katurich was employed by a division of Cooke Media Group. From 1985 to
1990, Mr. Katurich was employed at PricewaterhouseCoopers LLP. Mr. Katurich is a
Certified Public Accountant.

                                        8
<PAGE>   9

                                    PART II

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

     The Company's Common Stock is traded on the Nasdaq National Market under
the trading symbol "MASK". The Company's Common Stock began trading on July 21,
1995 upon completion of an initial public offering of the Company's Common
Stock. The range of daily closing prices on a per share basis for the Company's
Common Stock for the twelve months ended March 31, 1999 was:

<TABLE>
<CAPTION>
                                                               HIGH      LOW
                                                              ------    ------
<S>                                                           <C>       <C>
Year Ended March 31, 1999:
  Fourth quarter............................................  $14.13    $11.56
  Third quarter.............................................  $14.50    $ 8.69
  Second quarter............................................  $15.06    $ 9.88
  First quarter.............................................  $17.25    $13.25
Year Ended March 31, 1998:
  Fourth quarter............................................  $17.13    $13.00
  Third quarter.............................................  $24.00    $12.75
  Second quarter............................................  $23.88    $12.00
  First quarter.............................................  $14.75    $ 9.94
</TABLE>

     The reported closing sales price of the Company's Common Stock on the
Nasdaq National Market on March 31, 1999 was $11.56. As of March 31, 1999 there
were 87 holders of record of the Company's Common Stock.

     ARII has 35,000,000 shares of authorized Common Stock of $.01 par value, of
which 4,539,579 were outstanding as of March 31, 1999.

     ARII has not issued any Preferred Stock. ARII has elected not to pay any
cash dividends on its Common Stock as it currently intends to retain its
earnings to fund the development and growth of its business. In addition, the
Company's bank lines of credit includes certain restrictions and requirements
relating to the prohibition of dividend declarations or payments. The Company,
at this time, does not anticipate declaring or paying any cash dividends in the
foreseeable future.

                                        9
<PAGE>   10

ITEM 6. SELECTED FINANCIAL DATA

     The following selected consolidated financial data set forth below at March
31, 1999, and 1998 and for each of the three years in the period ended March 31,
1999, are derived from the audited financial statements of the Company included
herein. The selected consolidated financial data as of March 31, 1997 and 1996
and for the periods ended March 31, 1996 and 1995 are derived from the audited
consolidated financial statements of the Company, which are not included herein.
The information set forth below should be read in conjunction with the
Consolidated Financial Statements and Notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere herein.

<TABLE>
<CAPTION>
                                                      FISCAL YEARS ENDED MARCH 31,
                                           ---------------------------------------------------
                                            1999       1998       1997       1996       1995
                                           -------    -------    -------    -------    -------
                                                   (THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                        <C>        <C>        <C>        <C>        <C>
Consolidated Statement of Operations
  Data:
  Net sales..............................  $52,443    $46,721    $38,001    $33,290    $25,404
  Cost of sales..........................   34,410     29,236     23,530     20,491     15,887
                                           -------    -------    -------    -------    -------
     Gross profit........................   18,033     17,485     14,471     12,799      9,517
  Selling, general and administrative
     expenses............................    8,610      7,442      6,072      5,571      4,515
  Research and Development...............      926        509        333        198         --
                                           -------    -------    -------    -------    -------
  Income from operations.................    8,497      9,534      8,066      7,030      5,002
  Interest (income) expense, net.........      107       (122)      (308)      (345)       151
  Other expense (income), net............       17       (132)        (7)        20         49
                                           -------    -------    -------    -------    -------
     Income before income tax provision,
       minority interest, cumulative
       effect of change in accounting
       principle and extraordinary
       item..............................    8,373      9,788      8,381      7,355      4,802
Income tax provision.....................    3,069      3,688      3,056      2,219      1,216
Minority interest........................       --         --         --        172        162
                                           -------    -------    -------    -------    -------
Net income...............................  $ 5,304    $ 6,100    $ 5,325    $ 4,964    $ 3,424
                                           =======    =======    =======    =======    =======
Basic earnings per share.................  $  1.18    $  1.37    $  1.21    $  1.46    $  3.05
                                           =======    =======    =======    =======    =======
Shares used in per share computation.....    4,495      4,439      4,386      3,393      1,123
                                           =======    =======    =======    =======    =======
Diluted earnings per share...............  $  1.09    $  1.25    $  1.11    $  1.12    $  1.17
                                           =======    =======    =======    =======    =======
Shares used in per share computation.....    4,869      4,865      4,799      4,446      2,933
                                           =======    =======    =======    =======    =======
Consolidated Balance Sheet Data:
  Cash and cash equivalents..............  $ 6,328    $ 5,523    $ 6,734    $12,707    $ 3,861
  Working capital........................    2,130      6,636     10,727     17,254      3,849
  Property and equipment, net............   61,333     33,575     22,089      8,517      6,506
  Total assets...........................   80,292     51,158     38,781     30,422     17,261
  Long-term debt, less current
     portion(1)..........................   15,208         --         --         --      1,905
  Total shareholders' equity.............   43,302     37,766     31,373     25,285      5,977
</TABLE>

---------------
(1) As of March 31, 1999, includes $10,008,000 of equipment payables to be
    refinanced. See Note 6 of Notes to Consolidated Financial Statements.

                                       10
<PAGE>   11

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

     All references in this section to 1999, 1998 and 1997 relate to the fiscal
years ended March 31, 1999, 1998 and 1997, respectively.

RESULTS OF OPERATIONS

     The following table sets forth, for the periods indicated, certain items
from the Company's Consolidated Statements of Operations as a percentage of net
sales for the periods indicated:

CONSOLIDATED STATEMENT OF OPERATIONS DATA:

<TABLE>
<CAPTION>
                                                      FISCAL YEARS ENDED MARCH 31,
                                                      -----------------------------
                                                       1999       1998       1997
                                                      -------    -------    -------
<S>                                                   <C>        <C>        <C>
Net sales...........................................   100.0%     100.0%     100.0%
Cost of sales.......................................    65.6       62.6       61.9
                                                       -----      -----      -----
Gross profit........................................    34.4       37.4       38.1
Selling, general & administrative expenses..........    16.4       15.9       16.0
Research and development............................     1.8        1.1        0.9
                                                       -----      -----      -----
Income from operations..............................    16.2       20.4       21.2
Interest (income) expense, net......................      .2        (.3)      (0.8)
Other (income) expense, net.........................      --        (.3)        --
                                                       -----      -----      -----
Income before provision for income taxes............    16.0       21.0       22.0
Provision for income taxes..........................     5.9        7.9        8.0
                                                       -----      -----      -----
Net income..........................................    10.1%      13.1%      14.0%
                                                       =====      =====      =====
</TABLE>

  1999 Compared with 1998

     Net Sales -- Net sales were $52.4 million during 1999, an increase of 12.2%
compared to net sales of $46.7 million during 1998. The year was marked by
significant photomask product pricing pressures throughout the semiconductor
sector. This was primarily caused by the general slowdown in chip sales
throughout the semiconductor industry.

     Net Sales of U.S. operations were $29.6 million or 8% higher compared to
the prior year's net sales of $27.5 million. The U.S. operations overall
customer base increased as compared to the prior year. Net sales of European
operations were $22.8 million or 18.1% higher compared to prior year net sales
of $19.3 million. The 18% increase in European sales was effected by several
factors including photomask product pricing pressures and a slow down in the
release of new designs from its customers during the second half of 1999. Second
half sales were down 19% from the first half of the year. Despite the slowdown,
the Company moved aggressively forward with the ordering and installation of
several new high end pieces of equipment. Late in the third quarter, the Company
installed an ALTA 3500 laser imaging tool in Europe in order to facilitate the
Company's move to manufacture higher end product including photomask products
which meet .25 micron semiconductor design rules and manufacturing standards.

     Gross Profit -- Gross profit increased to $18.0 million during 1999, an
increase of 3.1% as compared to $17.5 million during 1998, resulting primarily
from increased sales. As a percentage of net sales, gross profit decreased to
34.4% in 1999, compared to 37.4% in 1998. The primary costs that affect gross
profit are materials, labor, depreciation, and overhead. The decrease was
primarily attributable to higher costs associated with depreciation, which
increased 39.9% in 1999 to $6.0 million up from $4.3 million in the prior year.
The Company anticipates that current and planned capital expenditures will cause
fixed costs to be higher in the future.

     Selling, General and Administrative Expenses -- Selling, general and
administrative expenses include salaries of sales personnel, marketing expense,
general and administrative expense and product distribution expense. Selling,
general and administrative expenses increased to $8.6 million during 1999, an
increase of

                                       11
<PAGE>   12

15.7% compared to $7.4 million in 1998. As a percentage of net sales, selling,
general and administrative expenses increased to 16.4% in 1999 compared with
15.9% in 1998. The increase in selling, general and administrative costs was
primarily attributable to increased sales expense due to the Company addition of
sales personnel which will position the Company to address its program to
penetrate the high end photomask product sector of the market. The Company
anticipates that selling, general and administrative costs will continue to
grow, however, they are expected to remain consistent as a percentage of sales.

     Research and Development -- Research and development ("R&D") expense is
comprised primarily of personnel costs, material consumption, depreciation and
engineering costs. The Company spent $926,000 or 1.8% of sales in 1999 as
compared with $509,000 or 1.1% in the prior year. The Company believes it will
continue to spend approximately 2% of sales on R&D projects primarily relating
to establishing new technologies including .25 micron, Optical Proximity
Correction and Phase Shift product manufacturing capabilities. The Company
anticipates that R&D expense will continue to increase in absolute dollar terms
in the future reflecting its strategy of advancing technology.

     Interest Income -- Interest income was $134,000 in 1999, compared to
$122,000 in 1998. The amounts for interest income are consistent from year to
year as the Company maintained approximately an equivalent amount of cash
throughout the year.

     Interest Expense -- Interest expense increased from zero in 1998 to
$241,000 in 1999. This was entirely attributable to the Company drawing down its
line of credit throughout the year. The Company anticipates that it will
continue to expand upon the utilization of its line of credit and consequently
interest expense is anticipated to increase significantly during the next fiscal
year.

     Provision for Income Taxes -- The effective income tax rate decreased to
36.7% in 1999 from 37.7% in 1998. The slight decrease in the effective income
tax rate is attributable to lower state taxes paid due to application of
available credits from capital expenditure purchases.

  1998 Compared with 1997

     Net Sales -- Net sales were $46.7 million during 1998, an increase of 23%
compared to net sales of $38.0 million during 1997. The increase in net sales is
attributable to increased demand from the Company's customers, the acquisition
of the photomask business unit of Temic and the utilization of increased
capacity through the addition of several key pieces of manufacturing equipment.

     Net Sales of U.S. operations were $27.5 million or 7% higher compared to
the prior year's net sales of $25.8 million. The U.S. operations overall
customer base increased as compared to the prior year, but sales volume was
affected by a drop in demand from thin-film head customers by 19%. Net sales of
European operations were $19.3 million or 58% higher compared to prior year net
sales of $12.2 million. The 58% increase in European sales was driven by an
increase in the overall demand from the customer base and an increase in sales
volume. European sales also include the new manufacturing facility in Heilbronn,
Germany, which began operations under the Company's control beginning June 1,
1997.

     The Company, in anticipation of future sales growth, continues to invest in
capital equipment to accommodate its customers who are continually enhancing
their product designs to smaller and more sophisticated geometries which the
Company believes helps drive the demand for photomasks. The Company intends to
install additional laser core imaging systems in both the U.S. and Europe to
address the demand for more advanced photomask products.

     Gross Profit -- Gross profit increased to $17.0 million during 1998, an
increase of 20.6% as compared to $14.1 million during 1997, resulting primarily
from higher costs associated with increased sales. As a percentage of net sales,
gross profit decreased slightly to 35.9% in 1998, compared to 37.2% in 1997. The
primary costs that affect gross profit are materials, labor, depreciation, and
overhead. The slight decrease was primarily attributable to higher costs
associated with depreciation, which increased 54.8% in 1998 to $4.3 million from
$2.8 million in the prior year. The Company anticipates that with the capital
expenditures planned and those already purchased fixed costs will be higher in
the future.

                                       12
<PAGE>   13

     Selling, General and Administrative Expenses -- Selling, general and
administrative expenses include salaries of sales personnel, marketing expense,
general and administrative expense and product distribution expense. Selling,
general and administrative expenses increased to $7.4 million during 1998, an
increase of 22.6% compared to $6.1 million in 1997. As a percentage of net
sales, selling, general and administrative expenses decreased slightly to 15.9%
in 1998 compared with 16.0% in 1997. The increase in selling, general and
administrative costs was primarily attributable to the purchase of the photomask
division of Temic in June 1997. The Company anticipates that selling, general
and administrative costs will continue to grow, however as a percentage of sales
they will be consistent.

     Interest Income -- Interest Income decreased to $122,000 in 1998, compared
to $308,000 in 1997. The decrease was attributable to lower cash balances on
deposit as a result of a large capital expenditure program taking place
throughout the year.

     Provision for Income Taxes -- The effective income tax rate increased to
37.5% in 1998 from 36.4% in 1997. The slight increase in the effective income
tax rate is attributable to a higher income tax rate from the ARGmbH's
operations compared to other manufacturing locations.

LIQUIDITY AND CAPITAL RESOURCES

     As compared to March 1998, total assets at March 31, 1999 grew 56.9% to
$80.3 million and shareholders' equity grew 14.7% to $43.3 million. The
Company's cash and cash equivalents increased $800,000 to $6.3 million at March
31, 1999. The increase was primarily a result of the Company drawing down $6.2
million of its available credit line to finance capital expenditures related to
the construction of cleanrooms and equipment purchases in connection with the
Company's expansion of manufacturing capacity in its U.S. and European
manufacturing sites.

     Net cash provided by operating activities was $19.1 million in 1999,
compared to $15.3 million in 1998. Operating cash flows in 1999 reflect lower
net income and higher non-cash charges related to depreciation and higher
accrued expense balances coupled with unpaid equipment payables at year end.

     Accounts receivable decreased slightly to $7.2 million at the end of 1999,
from $7.4 million at the end of 1998. During 1999, inventories remained
relatively consistent at $2.9 million at the end of 1999, compared to $2.8
million at the end of 1998. Inventory levels which consist primarily of raw
materials, chemicals and supplies were adequate to support the sales growth and
the expected continued increases in sales demand for the Company's products in
2000.

     Accounts payable decrease slightly to $4.2 million from $4.4 million in the
prior year. The Company incurred over $33.9 million in capital expenditures
throughout the year and as a consequence equipment payable of $17.6 million
remain unpaid as of year end compared to $1.2 million in the prior year. The
Company will utilize a combination of its existing line of credit and cash flow
to pay down the equipment payable balances throughout fiscal 2000.

     In 1999, cash used in investing activities totaled $23.9 million compared
to $16.8 million in 1998. The Company's capital expenditures during 1999 were
the highest in the Company's history and primarily related to the construction
of cleanrooms and the purchase of equipment which will support and complement
new process development and higher-end products and will increase revenue
generating capacity of each of its manufacturing sites located in the United
States and Europe. Investments in capital equipment have been, and are
anticipated to continue to be, a significant use of the Company's capital
resources.

     In 1999, cash from financing activities was $5.6 million. Cash from
financing activities included the net draw down of $5.2 million from its $25
million lines of credit. Obligations for equipment payables which the Company
has the ability and intent to further draw down on its available lines of credit
during fiscal year 2000 have been classified as long-term at March 31, 1999.
Furthermore, cash from financing activities was provided by the sale of 68,592
shares of ARII's Common Stock through the exercise of stock options, which
generated net proceeds of $162,989. In addition, 7,007 shares of Common Stock
were issued through the Company's Employee Stock Purchase Plan which generated
net proceeds of $69,229. The Company also received $149,511 of grant income from
a government source in Europe.
                                       13
<PAGE>   14

     During the year ended March 31, 1999, the Company increased its available
lines of credit from $20.0 million to $25.0 million. The lines of credit bear
interest at 1.25% above LIBOR. Under the terms of these lines of credit, the
Company would not be able to enter into certain transactions or declare
dividends without receiving prior written consent from the bank and would be
required to comply with certain financial covenants as well as maintain certain
financial ratios. The above lines of credit expire on September 30, 2000, if not
renewed.

     Management believes that funds generated from operations together with its
cash and cash equivalents will be sufficient to meet its normal operating
requirements during the coming year. If these funds prove to be insufficient, or
if new opportunities require the Company to supplement its financial resources,
the Company may use established credit lines with its corporate banker and or
seek additional financing or pursue other sources of financing; however, there
can be no assurance other sources of financing will be available at commercially
viable terms, if at all.

     The Company announced in May 1999 that it had signed a non-binding letter
of intent to purchase Harris Corporation's Imaging Technology Group (ITG)
semiconductor business unit, a photomask manufacturer located in Melbourne,
Florida. The acquisition is subject to a number of conditions, including the
preparation, negotiation and approval of a definitive agreement, satisfactory
completion of due diligence, obtaining required regulatory and other approvals,
and final agreement on the financial terms of the transaction.

READINESS FOR YEAR 2000

     Background. As the year 2000 approaches, a critical issue has emerged
regarding how existing application software programs, operating systems and
embedded computer chips can accommodate the year 2000 date value. The Company
has a year 2000 project team in place with overall responsibility for the
Company's year 2000 compliance programs. In addition, executive management
regularly monitors the status of the Company's year 2000 remediation plans.

     Project. The Company has identified potential year 2000 risks in four
categories: Software Information Systems Manufacturing Engineering facilities;
internal business software and information technology systems; systems other
than information technology systems ("Non-IT systems"); and third-party
suppliers to the Company. The Company's year 2000 project includes the following
phases for the first three categories above: (1) identifying year 2000 risks;
(2) assigning priorities to identified risks; (3) testing year 2000 compliance
for risks determined to be material to the Company; (4) correcting problems
determined to be material and not year 2000 compliant; (5) retesting corrections
that have been implemented; and (6) developing contingency plans. With respect
to the Company's third-party suppliers, the Company's year 2000 project consists
of the following phases: (1) contacting critical suppliers for information
concerning their year 2000 readiness; (2) prioritizing suppliers as to relative
importance; (3) validating supplier responses regarding year 2000 compliance.

     Assessment. The product that the Company sells to customers consist of no
date related issues; therefore, the Company believes that its current product
offerings are year 2000 compliant.

     Internal business software and systems consist primarily of the Company's
business information systems in the United States and Europe. The Company has
completed its initial year 2000 project phases with respect to its business
systems, and is in the process of developing, implementing and testing the
necessary modifications. The Company believes that its internal business
software and systems will be year 2000 compliant. However, if the Company's
business systems are not year 2000 compliant, the Company could experience
interruptions to its production process, development programs and general
business operations. The Company has been advised by the suppliers of its
manufacturing equipment, which consist primarily of micro-lithography writing
tools, process and inspection tools in the various buildings the Company
occupies, that such systems are year 2000 compliant.

     Third-party suppliers provide raw materials and in some case manufacturing
services incorporated by the Company into the products and systems it sells. The
Company is requiring that each of its key suppliers certify whether they are
year 2000 compliant. The Company has also prioritized its suppliers as critical
or non-critical

                                       14
<PAGE>   15

to the Company's business. Based on information received from these suppliers,
the Company estimates that approximately 80% of its critical suppliers are
presently year 2000 compliant. The Company plans to monitor its critical
suppliers and either develop alternate sources or increase inventory levels
prior to the year 2000 for those suppliers considered to be at risk of not
achieving year 2000 compliance. However, there can be no assurance that such
alternate sources will be available or that adequate inventory levels will be
attainable if necessary, and the Company could experience raw materials and or
parts shortages and production interruptions if one or more key third-party
suppliers experience year 2000 problems.

     Costs. Incremental costs of the Company's year 2000 project have primarily
consisted of upgrades to the Company's existing manufacturing and inspection
equipment. Such costs in the aggregate have not been material to the Company's
financial position, results of operations or cash flows. The balance of the
effort for the Company's year 2000 project has been by employees of the Company
whose costs for this project are not tracked separately. The Company currently
believes that costs for the remainder of the year 2000 compliance project will
not be material to the Company's financial position, results of operations or
cash flows.

     Risks. The Company's results of operations, financial condition and cash
flows could be materially and adversely affected if the Company or any of its
critical suppliers or customers do not achieve year 2000 compliance. Although
the Company's year 2000 compliance project is expected to minimize the Company's
risks of experiencing a year 2000 problem, inherent risks and uncertainties
exist despite the Company's efforts. There can be no assurance that a failure on
the part of the Company, its products, its suppliers or its customers will not
be disruptive to the Company's business. As a result of these uncertainties the
Company is unable to determine at this time whether the consequences of year
2000 failures will have a material effect on the Company's results of
operations, financial condition or cash flows.

FOREIGN OPERATIONS AND INFLATION

     Foreign operations are subject to certain risks inherent to conducting
business abroad, including product prices and currency exchange controls,
fluctuation in the relative value of currencies and restrictive governmental
actions. Changes in the relative value of currencies occur from time to time and
may, in certain instances, have a material adverse effect on the Company's
results of operations and cash flows. The Company does not hedge foreign
currency risks, and the effects of these risks are difficult to predict. The
risks associated with foreign operations have not, to date, had a material
adverse impact on the Company's results of operations and cash flows. There can,
however, be no assurance that such risks will not have a material adverse impact
on the Company's financial position, results of operations, and cash flows in
the future. See Note 14 of Notes to Consolidated Financial Statements for
segment information concerning the Company's operations.

     The effects of inflation are experienced by the Company through increases
in the cost of labor, services and raw materials. In general, these costs have
been anticipated and were offset to some degree by periodic increases in the
prices of its products and or higher manufacturing capacity utilization rates.
The Company does not believe, however, that inflation has had a material effect
on the results of operations in the past. There can be no assurance that the
Company's financial position, results of operations and cash flows will not be
materially affected by the effects of inflation any trends in the future.

EURO CONVERSION

     A single currency called the euro was introduced in Europe in January 1,
1999. Eleven of the fifteen member countries of the European Union ("EU")
adopted the euro as their common legal currency as of that date. Fixed
conversion rates between these participating countries' existing currencies (the
"legacy currencies") and the euro were established as of that date. The legacy
currencies will remain legal tender as denominations of the euro until at least
2002 (but not later than July 1, 2002). During this transition period, parties
may settle transactions using either the euro or participating country's legal
currency.

     The Company is still in the process of evaluating the effect, if any, of
the euro on its pricing of products in the eleven participating countries. The
Company does not expect a material impact on its results of operations from
foreign currency gains or losses as a result of its transition to the euro as
the functional currency for its subsidiaries based in EU countries.
                                       15
<PAGE>   16

FORWARD LOOKING STATEMENTS

     The preceding "Business" section and this "Management's Discussion and
Analysis of Financial Conditions and Results of Operations" section contain
various "forward looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities and
Exchange Act of 1934, as amended, which represent the Company's reasonable
judgment concerning the future and are subject to risks and uncertainties that
could cause the Company's actual operating results and financial position and
cash flows to differ materially, including the following: the Company's belief
that total photomask production in the United States and Europe will continue to
expand in 1999; the Company's belief that the custom integrated circuit
manufacturing segment of the market represents a growing market; the Company's
belief that outsourcing of photomask manufacturing will continue in the future;
the Company's belief that European demand will continue to be strong going
forward; the Company's potential expansion in certain international markets and
any corresponding increase in manufacturing capacity; the Company's expectation
that it will be able to finance such capital expenditures and, any other
expansion, with existing funds and funds generated from operations and its
available lines of credit; the Company's intention to expand its laser beam
imaging capabilities by installing two Etec Alta 3500 systems and the belief
that such systems will allow the Company to meet the requirements imposed by .25
micron photomask production, and the Company's intention to assess and modify
its computer software systems to ensure that they are Year 2000 compliant; and
the Company's belief that it anticipates selling, general and administrative
costs as a percentage of net sales to remain consistent.

     The Company cautions that the above statements are further qualified by
important factors that could cause the Company's actual operating results to
differ materially from those in the forward looking statements, including,
without limitation, the following: a change in economic conditions in the
Company's markets which could adversely affect the level of demand for the
Company's products; failure of the Company to anticipate, respond to or utilize
changing technologies used in the production of photomasks; greater than
anticipated competition; manufacturing difficulties or capacity limitations;
shortage of raw materials; delays in the delivery of recently purchased
manufacturing equipment to the Company; greater than anticipated capital
investment requirements; and currency fluctuations or changes in political
conditions with respect to the Company's foreign operations.

ITEM 7A -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The Company's operations include manufacturing and sales activities in the
U.S. and Europe. As a result, the Company's financial results could be affected
by factors such as change in foreign currency exchange rates or weak economic
conditions in the foreign markets in which the Company operates. The Company's
operating results are exposed to changes in exchange rates between the U.S.
dollar and various foreign currencies, including the British pound and the
German mark. When the U.S. dollar strengthens against these currencies, the
value of the nonfunctional currency sales decrease. When the U.S. dollar
weakens, the functional currency amount of sales increases.

INTEREST RATE RISK

     The Company does not hold financial instruments for trading or speculative
purposes. The financial assets of the Company are not subject to significant
interest rate risk due to their short duration. The financial liabilities of the
Company that are subject to interest rate risk are its long-term debt
(principally its lines of credit expiring in September 2000). The Company does
not use any derivatives or similar instruments to manage its interest rate risk.
A 90 basis-point increase in interest rates affecting the Company's financial
instruments would have an immaterial effect on the Company's 1998 and 1997
pretax earnings.

                                       16
<PAGE>   17

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                        AND FINANCIAL STATEMENT SCHEDULE

<TABLE>
<CAPTION>
                                                              PAGE NO.
                                                              --------
<S>                                                           <C>
Report of Independent Accountants...........................     18
Financial Statements:
  Consolidated Balance Sheets at March 31, 1999 and 1998....     19
  For the years ended March 31, 1999, 1998, and 1997:
     Consolidated Statements of Operations..................     20
     Consolidated Statements of Comprehensive Income........     21
     Consolidated Statements of Shareholders' Equity........     22
     Consolidated Statements of Cash Flows..................     23
Notes to Consolidated Financial Statements..................     24
Supporting Consolidated Financial Statement Schedule:
     Report of Independent Accountants on Financial
      Statement Schedule....................................     36
     Schedule II. Valuation and Qualifying Accounts.........     37
</TABLE>

     Schedules other than those listed above have been omitted since they are
not required, are not applicable, or the required information is shown in the
consolidated financial statements or related notes.

                                       17
<PAGE>   18

                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders of Align-Rite International, Inc.

     In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, shareholders' equity, cash flows
and comprehensive income present fairly, in all material respects, the financial
position of Align-Rite International, Inc. and its subsidiaries (the "Company)
at March 31, 1999 and 1998 and the results of their operations and their cash
flows for each of the three years in the period ended March 31, 1999 in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.

PricewaterhouseCoopers LLP

Los Angeles, California
May 28, 1999

                                       18
<PAGE>   19

                         ALIGN-RITE INTERNATIONAL, INC.

                          CONSOLIDATED BALANCE SHEETS

                                     ASSETS

<TABLE>
<CAPTION>
                                                                     AT MARCH 31,
                                                              --------------------------
                                                                 1999           1998
                                                              -----------    -----------
<S>                                                           <C>            <C>
Current assets:
  Cash and cash equivalents.................................  $ 6,328,191    $ 5,523,416
  Accounts receivable, less allowance for doubtful accounts
     of $458,157 and $278,495 at March 31, 1999 and 1998,
     respectively...........................................    7,171,122      7,395,086
  Inventories...............................................    2,882,010      2,783,070
  Prepaid and other current assets..........................      141,918        212,395
  Deferred taxes............................................    1,176,152        622,219
                                                              -----------    -----------
          Total current assets..............................   17,699,393     16,536,186
  Property and equipment, net...............................   61,332,883     33,574,694
  Intangible assets, less accumulated amortization of
     $106,456 and $50,211 at March 31, 1999 and 1998,
     respectively...........................................      808,840        915,296
  Other assets..............................................      355,251        131,986
  Deferred tax asset, non-current...........................       95,271             --
                                                              -----------    -----------
          Total assets......................................  $80,291,638    $51,158,162
                                                              ===========    ===========

                          LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Trade accounts payable....................................  $ 4,181,964    $ 4,371,569
  Equipment payables, current portion.......................    7,636,000      1,200,000
  Accrued expenses and other current liabilities............    3,328,260      2,927,039
  Taxes payable.............................................      422,678      1,401,983
                                                              -----------    -----------
          Total current liabilities.........................   15,568,902      9,900,591
  Equipment payables, long-term portion.....................   10,008,000             --
  Deferred taxes............................................    5,355,680      2,792,938
  Other liabilities.........................................      856,804        698,301
  Long-term debt............................................    5,200,000             --
  Commitments and contingencies
  Shareholders' equity:
     Common stock -- $.01 par value
     Authorized -- 35,000,000 shares; 4,539,579 and
      4,463,980 shares issued and outstanding at March 31,
      1999 and 1998, respectively...........................       45,396         44,640
  Additional paid-in-capital................................   19,045,282     18,589,170
  Retained earnings.........................................   24,098,121     18,794,209
  Accumulated other comprehensive income....................      113,453        338,313
                                                              -----------    -----------
          Total shareholders' equity........................   43,302,252     37,766,332
                                                              -----------    -----------
          Total liabilities and shareholders' equity........  $80,291,638    $51,158,162
                                                              ===========    ===========
</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.
                                       19
<PAGE>   20

                         ALIGN-RITE INTERNATIONAL, INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                            FOR THE YEARS ENDED MARCH 31,
                                                      -----------------------------------------
                                                         1999           1998           1997
                                                      -----------    -----------    -----------
<S>                                                   <C>            <C>            <C>
Net sales...........................................  $52,442,520    $46,721,054    $38,000,597
Cost of sales.......................................   34,410,436     29,235,531     23,530,297
                                                      -----------    -----------    -----------
          Gross profit..............................   18,032,084     17,485,523     14,470,300
Selling, general and administrative expenses........    8,609,775      7,442,474      6,072,166
Research and development............................      926,000        509,000        333,000
                                                      -----------    -----------    -----------
          Income from operations....................    8,496,309      9,534,049      8,065,134
Interest expense....................................      240,602             --             --
Interest income.....................................     (133,614)      (121,776)      (308,531)
Other expense (income), net.........................       16,742       (132,239)        (7,562)
                                                      -----------    -----------    -----------
  Income before provision for income taxes..........    8,372,579      9,788,064      8,381,227
Income tax provision................................    3,068,667      3,687,563      3,056,440
                                                      -----------    -----------    -----------
Net income..........................................  $ 5,303,912    $ 6,100,501    $ 5,324,787
                                                      ===========    ===========    ===========
Basic earnings per share............................  $      1.18    $      1.37    $      1.21
                                                      ===========    ===========    ===========
Shares used in per share computation................    4,495,200      4,439,147      4,386,387
                                                      ===========    ===========    ===========
Diluted earnings per share..........................  $      1.09    $      1.25    $      1.11
                                                      ===========    ===========    ===========
Shares used in per share computation................    4,869,419      4,865,176      4,798,753
                                                      ===========    ===========    ===========
</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.
                                       20
<PAGE>   21

                         ALIGN-RITE INTERNATIONAL, INC.

                CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

<TABLE>
<CAPTION>
                                                             FOR THE YEARS ENDED MARCH 31,
                                                        ---------------------------------------
                                                           1999           1998          1997
                                                        -----------    ----------    ----------
<S>                                                     <C>            <C>           <C>
Net income............................................  $ 5,303,912    $6,100,501    $5,324,787
Other comprehensive income:
  Foreign currency translation adjustments............     (224,860)       (9,686)      304,740
                                                        -----------    ----------    ----------
Comprehensive income..................................  $ 5,079,052    $6,090,815    $5,629,527
                                                        ===========    ==========    ==========
</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.
                                       21
<PAGE>   22

                         ALIGN-RITE INTERNATIONAL, INC.

                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
               FOR THE YEARS ENDED MARCH 31, 1999, 1998 AND 1997

<TABLE>
<CAPTION>
                                                                                        ACCUMULATED
                                        COMMON STOCK       ADDITIONAL                      OTHER           TOTAL
                                     -------------------    PAID-IN-      RETAINED     COMPREHENSIVE   SHAREHOLDERS'
                                      SHARES     AMOUNT      CAPITAL      EARNINGS        INCOME          EQUITY
                                     ---------   -------   -----------   -----------   -------------   -------------
<S>                                  <C>         <C>       <C>           <C>           <C>             <C>
Balance at March 31, 1996..........  4,346,415   $43,464   $17,828,915   $ 7,368,921     $ 43,259       $25,284,559
  Net income.......................         --        --            --     5,324,787           --         5,324,787
  Exercise of stock options........     64,257       643        83,578            --           --            84,221
  Issuance of Common Stock in
     connection with employee stock
     purchase plan purchases.......      5,116        51        47,784            --           --            47,835
  Compensation related to stock
     options granted...............         --        --       110,616            --           --           110,616
  Tax benefit resulting from
     exercise of options...........         --        --       215,747            --           --           215,747
  Translation adjustments..........         --        --            --            --      304,740           304,740
                                     ---------   -------   -----------   -----------     --------       -----------
Balance at March 31, 1997..........  4,415,788    44,158    18,286,640    12,693,708      347,999        31,372,505
  Net income.......................         --        --            --     6,100,501           --         6,100,501
  Exercise of stock options........     41,172       412        82,745            --           --            83,157
  Issuance of Common Stock in
     connection with employee stock
     plan purchases................      7,020        70        67,813            --           --            67,883
  Compensation related to stock
     options granted...............         --        --       110,616            --           --           110,616
  Tax benefit resulting from
     exercise of options...........         --        --        41,356            --           --            41,356
  Translation adjustments..........         --        --            --            --       (9,686)           (9,686)
                                     ---------   -------   -----------   -----------     --------       -----------
Balance at March 31, 1998..........  4,463,980    44,640    18,589,170    18,794,209      338,313        37,766,332
  Net income.......................                                        5,303,912                      5,303,912
  Exercise of stock options........     68,592       686       162,303            --           --           162,989
  Issuance of Common Stock in
     connection with employee stock
     plan purchases................      7,007        70        69,159            --           --            69,229
  Compensation related to stock
     options granted...............         --        --       110,616            --           --           110,616
  Tax benefit resulting from
     exercise of options...........         --        --       114,034            --           --           114,034
  Translation adjustments..........         --        --            --            --     (224,860)         (224,860)
                                     ---------   -------   -----------   -----------     --------       -----------
Balance at March 31, 1999..........  4,539,579   $45,396   $19,045,282   $24,098,121     $113,453       $43,302,252
                                     =========   =======   ===========   ===========     ========       ===========
</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.
                                       22
<PAGE>   23

                         ALIGN-RITE INTERNATIONAL, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                          FOR THE YEARS ENDED MARCH 31,
                                                   --------------------------------------------
                                                       1999            1998            1997
                                                   ------------    ------------    ------------
<S>                                                <C>             <C>             <C>
Cash flows from operating activities:
  Net income.....................................  $  5,303,912    $  6,100,501    $  5,324,787
  Adjustments to reconcile net income to net cash
     provided by operating activities:
     Depreciation and amortization...............     5,989,157       4,280,554       2,773,946
     Deferred tax provision......................     1,913,538       1,203,388         860,328
     Bad debt expense............................       179,662           7,002              --
     Gain on sale of property and equipment......            --              --          (9,543)
     Compensation related to stock options
       granted...................................       110,616         110,616         110,616
Changes in assets and liabilities:
  Accounts receivable trade and other............        18,306      (1,283,994)        (21,197)
  Inventories....................................      (108,184)       (604,130)       (312,192)
  Prepaids and other assets......................      (153,929)        883,354         (59,128)
  Trade accounts payable.........................      (136,068)        702,438         230,377
  Equipment payables.............................     6,435,000       1,200,000              --
  Accrued expenses and other current
     liabilities.................................      (420,961)      2,689,525       1,197,086
                                                   ------------    ------------    ------------
          Net cash provided by operating
            activities...........................    19,131,049      15,289,254      10,095,080
                                                   ------------    ------------    ------------
Cash flows from investing activities:
  Purchase of property and equipment.............   (23,886,405)    (14,300,383)    (16,001,528)
  Payments for business acquisition, net of cash
     received....................................            --      (2,467,000)             --
  Proceeds from the sale of property and
     equipment...................................            --              --          12,000
                                                   ------------    ------------    ------------
          Net cash used in investing
            activities...........................   (23,886,405)    (16,767,383)    (15,989,528)
                                                   ------------    ------------    ------------
Cash flows from financing activities:
  Proceeds from line of credit...................     6,200,000              --              --
  Principal payments on line of credit...........    (1,000,000)             --              --
  Proceeds from stock options exercised..........       162,989          83,157          84,221
  Proceeds from sale of stock under employee
     stock purchase plan.........................        69,229          67,883          47,835
  Grant income received..........................       149,511         119,731              --
                                                   ------------    ------------    ------------
          Net cash provided by financing
            activities...........................     5,581,729         270,771         132,056
                                                   ------------    ------------    ------------
Effect of exchange rate on cash..................       (21,598)         (2,956)       (210,835)
                                                   ------------    ------------    ------------
Net increase (decrease) in cash..................       804,775      (1,210,314)     (5,973,227)
Cash and cash equivalents, beginning of year.....     5,523,416       6,733,730      12,706,957
                                                   ------------    ------------    ------------
Cash and cash equivalents, end of year...........  $  6,328,191    $  5,523,416    $  6,733,730
                                                   ============    ============    ============
Supplemental disclosures of cash flow
  information:
Cash paid during the year for:
  Interest.......................................  $    211,111              --              --
  Income taxes...................................  $  1,819,397    $  1,970,600    $  1,876,000
Non-cash activities:
  Tax benefit related to stock options...........  $    114,034    $     41,356    $    215,747
  Equipment purchases to be refinanced under
     available lines of credit...................  $ 10,008,000              --              --
</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.
                                       23
<PAGE>   24

                         ALIGN-RITE INTERNATIONAL, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 1. BUSINESS AND BASIS OF CONSOLIDATION:

     The Consolidated Financial Statements include the accounts of Align-Rite
International, Inc. ("ARII"), a California corporation, incorporated on April
27, 1995, and its wholly-owned subsidiaries, Align-Rite International Limited
("ARI"), Align-Rite Corporation ("ARC"), and Align-Rite Limited ("ARL"),
Align-Rite B.V. ("ARBV") and Align-Rite GmbH ("ARGmbH"). The principal activity
of ARII, ARI and ARBV is that of holding companies into which their respective
subsidiaries are consolidated. ARII and its subsidiaries are collectively
referred to as the "Company". All significant intercompany accounts and
transactions have been eliminated.

     The Company manufactures quality photomasks in the United States and
Europe. Photomasks are required for the manufacture of virtually all integrated
circuits, which are essential components in consumer and industrial electronic
products. Photomasks are precision photographic quartz or glass plates
containing microscopic images of integrated circuits. The Company images
integrated circuit patterns onto photomasks using electron beam, laser beam and
optical microlithography methods at its manufacturing facilities in Burbank,
California, Bridgend, Wales and Heilbronn, Germany.

     The Company maintains a policy and practice of restricting ARC from paying
dividends or making certain other distributions in order to minimize tax
consequences resulting from its current corporate structure.

 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

  Use of Estimates

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

  Cash Equivalents

     The Company considers all highly liquid debt instruments purchased with an
initial maturity of three months or less to be cash equivalents.

  Inventories

     Inventories consist primarily of raw materials and are valued at the lower
of cost or market. Cost is determined on a first-in, first-out basis. Management
periodically reviews the composition of inventory in order to identify obsolete,
slow moving or otherwise unsaleable items. If such items are observed and there
are no alternative uses of the inventory, the Company will take a write-down to
net realizable value in the period that the units are identified as impaired.
Historically, inventory write-downs have been insignificant and consistently
within management's expectations.

     The Company purchases a majority of its raw materials from a foreign
supplier. The Company does not hedge foreign currency risks.

  Property and Equipment

     Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is computed using the straight-line method based upon
the estimated useful lives of the assets, ranging from three to ten years.
Useful lives are evaluated regularly by management in order to determine
recoverability in light of current technological conditions. Leasehold
improvements are amortized over the shorter of the life of the lease or the
improvement. Maintenance and repairs are charged to expense as incurred while
renewals and

                                       24
<PAGE>   25
                         ALIGN-RITE INTERNATIONAL, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

improvements are capitalized. Upon the sale or retirement of property and
equipment, the accounts are relieved of the cost and the related accumulated
depreciation or amortization with any resulting gain or loss included in the
Statement of Operations.

  Intangible and Other Long-lived Assets

     Intangible assets consist primarily of goodwill, and are amortized on a
straight-line basis over 15 years.

     The carrying values of intangible and other long-lived assets are reviewed
quarterly to determine if any impairment indicators are present. If it is
determined that such indicators are present and the review indicates that the
assets will not be recoverable, in whole or in part, based on undiscounted
estimated cash flows over the remaining amortization period, their carrying
values are reduced to estimated fair market value. Impairment indicators
include, among other conditions, cash flow deficits, an historic or anticipated
decline in revenues or operating profit, adverse legal or regulatory
developments, and a material decrease in the fair value of some or all of the
assets.

  Research and Development

     Research and development costs are expensed as incurred.

  Income Taxes

     The Company utilizes the liability method of accounting for income taxes.
Under this method, deferred tax liabilities and assets are determined based on
the difference between the financial statement and the tax bases of assets and
liabilities using enacted tax rates in effect for the period in which the
differences are expected to reverse. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amount expected to be realized.

  Revenue Recognition

     The Company recognizes revenue when the title to goods passes to the
customer, generally upon shipment. The Company provides an accrual for estimated
volume discounts for certain customers at the time of shipment and adjusts this
accrual as needed based upon actual results.

  Net Income Per Common Share

     Net income per common share ("basic EPS") is computed by dividing net
income available to common shareholders (the numerator) by the weighted average
number of common shares outstanding (the denominator) during the period. The
computation of net income per common share -- assuming dilution ("diluted EPS")
is similar to the computation of basic EPS except that the denominator is
increased to include the number of additional common shares that would have been
outstanding if the dilutive potential common shares had been issued.

  Accounting for Stock-Based Compensation

     The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board Opinion No. 25
("APB No. 25"), "Accounting for Stock Issued to Employees" and complies with the
disclosure requirements of SFAS No. 123, "Accounting for Stock-Based
Compensation." Under APB No. 25, compensation cost, if any, is recognized over
the respective vesting period based on the difference, at the date of grant,
between the fair value of the Company's Common Stock and the exercise price.
Pursuant to the provision of APB No. 25 and its related interpretations, the
Company treats all members of the Board of Directors as functionally equivalent
employees and, accordingly, no

                                       25
<PAGE>   26
                         ALIGN-RITE INTERNATIONAL, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

compensation expense is recorded for stock option awards to such individuals if
the exercise price of the stock option equals the market value of the underlying
stock on the date of grant.

  Translation of Foreign Currencies

     Translation of foreign currencies is accounted for using the local currency
as the functional currency of the Company's foreign subsidiaries. All assets and
liabilities are translated at exchange rates in effect on the balance sheet
dates while revenues and expenses are translated at average rates in effect for
the period. The resulting gains and losses are included in a separate component
of shareholders' equity. Realized gains (losses) on foreign currency
transactions are reflected in net income and were not significant for 1999, 1998
and 1997.

  Comprehensive Income

     In 1998, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 130, "Reporting Comprehensive Income," and accordingly has included a
separate Statement of Comprehensive Income. Comprehensive income generally
represents all changes in shareholders' equity during the period except those
resulting from investments by, or distributions to, shareholders.

  Segment Information

     In 1999, the Company adopted SFAS No. 131, "Disclosures about Segments of a
Business Enterprise and Related Information. "SFAS No. 131 supersedes SFAS No.
14, "Financial Reporting for Segments of a Business Enterprise," replacing the
"industry segment" approach with the "management" approach. The management
approach designates the internal organization that is used by management for
making operating decisions and assessing performance as the source of the
Company's reportable segments. SFAS No. 131 did not affect results of operations
or financial position but did affect the disclosure of segment information. See
Note 15.

  Reclassifications

     Certain amounts in the prior year financial statements have been
reclassified to conform with the current year classifications.

 3. INVENTORIES:

     Inventories, by component, consist of the following at March 31:

<TABLE>
<CAPTION>
                                                                 1999          1998
                                                              ----------    ----------
<S>                                                           <C>           <C>
Raw materials...............................................  $2,700,400    $2,531,358
Work-in-process.............................................      91,465       123,873
Supplies....................................................      90,145       127,839
                                                              ----------    ----------
                                                              $2,882,010    $2,783,070
                                                              ==========    ==========
</TABLE>

                                       26
<PAGE>   27
                         ALIGN-RITE INTERNATIONAL, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 4. PROPERTY AND EQUIPMENT:

     Property and equipment consist of the following at March 31:

<TABLE>
<CAPTION>
                                                               1999           1998
                                                            -----------    -----------
<S>                                                         <C>            <C>
Plant and machinery.......................................  $69,943,388    $49,678,066
Leasehold improvements....................................    1,628,692      1,453,590
Furniture and fixtures....................................    2,712,634      4,038,457
                                                            -----------    -----------
                                                             74,284,714     55,170,113
Less, accumulated depreciation and amortization...........  (27,669,910)   (22,235,256)
                                                            -----------    -----------
                                                             46,614,804     32,934,857
Construction in progress..................................   14,718,079        639,837
                                                            -----------    -----------
                                                            $61,332,883    $33,574,694
                                                            ===========    ===========
</TABLE>

     At March 31, 1999 and 1998, the Company had approximately $15,300,000 and
$13,700,000, respectively, of fully depreciated assets still in use.

 5. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES:

     Accrued and other current liabilities consists of the following at March
31:

<TABLE>
<CAPTION>
                                                                 1999          1998
                                                              ----------    ----------
<S>                                                           <C>           <C>
Volume discounts............................................  $  766,455    $  450,250
Bonuses.....................................................      81,995       362,657
Vacation and payroll........................................   1,191,395     1,068,987
Deferred revenue............................................      50,982       178,176
Audit and legal fees........................................     245,717       221,516
Sales tax payable...........................................     673,134       116,903
Other.......................................................     318,582       528,550
                                                              ----------    ----------
                                                              $3,328,260    $2,927,039
                                                              ==========    ==========
</TABLE>

 6. LONG-TERM DEBT:

     ARC maintains a line of credit agreement with a bank to obtain financing of
up to $15,000,000 at a variable interest rate, equal to 1.25% above the bank's
LIBOR rate (4.97% at March 31, 1999), per annum, expiring on September 30, 2000,
if not extended. The line of credit is guaranteed by ARII and ARI and has
certain restrictions and requirements relating to, among other things:
prohibition of dividend declarations or payments, prohibition of the repurchase
of the Company's common stock, maintenance of properties and insurance, the
maintenance of certain financial ratios, and the limitations on additional
borrowings, additional loans, liens and encumbrances assumed, and the transfer
of assets. During the year ended March 31, 1999, the Company borrowed
$6,200,000, of which $5,200,000 remained outstanding at March 31, 1999. All
borrowings plus accrued interest, if any, are due upon expiration of this line
of credit.

     Additionally, ARII maintains a line of credit agreement with a bank to
obtain financing of up to $10,000,000 at a variable interest rate, equal to
1.25% above the bank's LIBOR rate, per annum, expiring on September 30, 2000, if
not extended. The line of credit is guaranteed by ARC and ARI. This agreement
contains similar restrictive covenants to those described in the ARC line of
credit agreement above. At March 31, 1999, no amounts were outstanding under
this agreement.

                                       27
<PAGE>   28
                         ALIGN-RITE INTERNATIONAL, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     The Company intends to refinance equipment payables of $10,008,000 that
were outstanding as of March 31, 1999 utilizing the above lines of credit.
Accordingly, this amount has been classified as a non-current liability at March
31, 1999.

 7. INCOME TAXES:

     The components of the United States and foreign income before provision for
income taxes and minority interest and the components of the provisions for
income taxes are as follows:

<TABLE>
<CAPTION>
                                                     FOR THE YEARS ENDED MARCH 31,
                                                 --------------------------------------
                                                    1999          1998          1997
                                                 ----------    ----------    ----------
<S>                                              <C>           <C>           <C>
Income before provision for income taxes and
  minority interest:
     United States.............................  $4,458,235    $5,231,768    $5,054,202
     Foreign...................................   3,914,344     4,556,296     3,327,025
                                                 ----------    ----------    ----------
          Total................................  $8,372,579    $9,788,064    $8,381,227
                                                 ==========    ==========    ==========
Provision for income taxes:
  Current
     Federal...................................  $  262,523    $  881,122    $1,467,145
     State.....................................       1,600         1,600         1,600
     Foreign...................................     891,006     1,601,453       727,367
                                                 ----------    ----------    ----------
                                                  1,155,129     2,484,175     2,196,112
  Deferred
     Federal...................................   1,136,708       972,350       724,177
     State.....................................     312,054       (30,704)     (152,593)
     Foreign...................................     464,776       261,742       288,744
                                                 ----------    ----------    ----------
                                                  1,913,538     1,203,388       860,328
                                                 ----------    ----------    ----------
          Total................................  $3,068,667    $3,687,563    $3,056,440
                                                 ==========    ==========    ==========
</TABLE>

     The difference between the Company's effective income tax rate and the
United States federal statutory rate are as follows:

<TABLE>
<CAPTION>
                                                               FOR THE YEARS ENDED
                                                                    MARCH 31,
                                                             ------------------------
                                                             1999      1998      1997
                                                             ----      ----      ----
<S>                                                          <C>       <C>       <C>
Federal statutory rate.....................................  34.0%     34.0%     34.0%
State taxes, net of federal benefit........................   2.5%     (0.2)%      --
Other......................................................   0.2%      3.9%      2.5%
                                                             ----      ----      ----
          Total............................................  36.7%     37.7%     36.5%
                                                             ====      ====      ====
</TABLE>

                                       28
<PAGE>   29
                         ALIGN-RITE INTERNATIONAL, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     The components of temporary differences which give rise to the Company's
net deferred taxes at March 31, 1999 and 1998 are as follows:

<TABLE>
<CAPTION>
                                                               1999           1998
                                                            -----------    -----------
<S>                                                         <C>            <C>
Deferred tax assets:
  State tax credits.......................................  $   621,648    $   426,991
  Inventory capitalization................................      225,369             --
  AMT credit..............................................      233,000             --
  Foreign accrued interest................................      497,583        462,514
  Deferred revenue........................................      212,114             --
  Net operating losses....................................      164,854         29,372
  Other...................................................      430,021        307,131
                                                            -----------    -----------
                                                              2,384,589      1,226,008
  Valuation allowance.....................................           --        (29,372)
                                                            -----------    -----------
  Gross deferred tax assets...............................    2,384,589      1,196,636

Deferred tax liabilities:
  Depreciation and amortization...........................   (6,409,606)    (3,306,394)
  Other...................................................      (59,240)       (60,961)
                                                            -----------    -----------
  Gross deferred tax liabilities..........................   (6,468,846)    (3,367,355)
                                                            -----------    -----------
  Net deferred taxes......................................  $(4,084,257)   $(2,170,719)
                                                            ===========    ===========
</TABLE>

     As a result of the Company's earnings history, management believes that a
valuation allowance for the Company's gross deferred tax assets was not required
at March 31, 1999. A valuation allowance of $29,372 was provided at March 31,
1998 based primarily on carryforward amounts which were not expected to be
utilized by the foreign entity relating to capital leases and net operating loss
carryforwards.

     At March 31, 1999, the Company had a federal operating loss carryforward of
approximately $165,000 which begins to expire in 2019. For State Franchise Tax
purposes in 1999 and 1998, the Company generated excess California prior year
manufacturers' investment credits of approximately $622,000 and $430,000,
respectively; these credits begin expiring in 2005.

 8. COMMITMENTS AND CONTINGENCIES:

     The Company leases its facilities and certain equipment under noncancelable
operating leases expiring through March 2006. The facility leases require the
Company to maintain and repair the leased premises and pay its pro rata share of
increases in real property taxes over the base year. All leases provide for
renewal options and are subject to consumer price index adjustments at various
times during the lease or renewal periods.

                                       29
<PAGE>   30
                         ALIGN-RITE INTERNATIONAL, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     Future minimum lease payments related to noncancelable operating leases at
March 31, 1999 are summarized below:

<TABLE>
<CAPTION>
                                                              OPERATING
                                                                LEASES
                                                              ----------
<S>                                                           <C>
2000........................................................  $  873,545
2001........................................................     675,203
2002........................................................     648,511
2003........................................................     667,713
2004........................................................     668,863
Thereafter..................................................   2,050,369
                                                              ----------
                                                              $5,584,204
                                                              ==========
</TABLE>

     Rent expense for the years ended March 31, 1999, 1998 and 1997 was
$1,013,571, $847,254 and $489,991, respectively.

 9. NET INCOME PER COMMON SHARE

     In 1998, the Company adopted SFAS No. 128, "Earnings Per Share." This
statement requires dual presentation of newly defined basic and diluted earnings
per shares ("EPS") on the face of the income statement for all entities with
complex capital structures. The following table provides a reconciliation of the
numerators and denominators of the basic and diluted per share computations for
the years ended March 31, 1999, 1998 and 1997:

<TABLE>
<CAPTION>
                                                   INCOME          SHARES        PER SHARE
                                                 (NUMERATOR)    (DENOMINATOR)     AMOUNT
                                                 -----------    -------------    ---------
<S>                                              <C>            <C>              <C>
Year Ended March 31, 1999:
  Basic EPS....................................  $5,303,912       4,495,200        $1.18
  Effect of dilutive securities:
     Stock Options.............................          --         374,219
                                                 ----------       ---------
  Diluted EPS..................................  $5,303,912       4,869,419        $1.09
                                                 ==========       =========
Year Ended March 31, 1998:
  Basic EPS....................................  $6,100,501       4,439,147        $1.37
  Effect of dilutive securities:
     Stock Options.............................          --         426,029
                                                 ----------       ---------
  Diluted EPS..................................  $6,100,501       4,865,176        $1.25
                                                 ==========       =========
Year Ended March 31, 1997:
  Basic EPS....................................  $5,324,787       4,386,387        $1.21
  Effect of dilutive securities:
     Stock Options.............................          --         412,366
                                                 ----------       ---------
  Diluted EPS..................................  $5,324,787       4,798,753        $1.11
                                                 ==========       =========
</TABLE>

     The computation of Diluted EPS excludes the effect of unexercised
anti-dilutive securities. The numbers of such securities excluded were
approximately 189,000, 138,000 and 136,000 for the years ended March 31, 1999,
1998 and 1997, respectively.

10. RETIREMENT PLANS:

     Effective October 1, 1994, ARC established a qualified 401(k) Profit
Sharing Plan (the "Plan") available to all employees who meet the Plan's
eligibility requirements. Employees can elect to contribute from 1% to 15% of
their earnings to the Plan. This Plan, which is a defined contribution plan,
provides that ARC will, at its discretion, make contributions to the Plan on a
periodic basis. Additionally, the employer will

                                       30
<PAGE>   31
                         ALIGN-RITE INTERNATIONAL, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

match 25% of the first 6% of the employees contribution, which amounts vest over
five years. Terminations and forfeitures from the Plan are used to reduce the
employer's contribution. ARC made contributions to the Plan of $80,241, $68,380
and $48,241 in 1999, 1998, and 1997.

     In the United Kingdom, two defined contribution plans exist: the Standard
Life Pension Scheme and the Standard Life Executive Pension Scheme (the
"Plans"). The Plans are Inland Revenue approved plans. ARL contributes between
4% and 10% of the employees current salary for all member employees and
contributes 8% for one employee in regards to the Executive Scheme. Membership
in the Plans is subject to a qualifying period to be specified for each
individual. Employer contributions to the Plans in 1999, 1998 and 1997 were
$88,310, $66,438 and $22,423, respectively.

11. EMPLOYEE STOCK PURCHASE PLAN

     The Company has an Employee Stock Purchase Plan which enables substantially
all employees to purchase shares of Common Stock on annual offering dates at a
purchase price of 85% of the fair market value of the shares on the grant date
or, if lower, 85% of the fair market value of the shares on the exercise date. A
maximum of 75,000 shares are authorized for subscription, of which 7,007, 7,020
and 5,116 shares were purchased in the fourth quarter of 1999, 1998 and 1997 at
$9.88, $9.67 and $9.35 per share, respectively.

12. STOCK OPTION PLANS:

     ARI adopted an Employee Share Option Scheme in 1987 (the "1987 Plan"), in
which share options were granted to executives and key employees to purchase
ARI's Ordinary Shares. After giving effect to the Company's initial public
offering, 354,625 options were outstanding and exercisable. As of March 31,
1999, the Company had 166,165 shares outstanding under the 1987 Plan. Upon
exercise, these shares are exchangeable on a one-for-one basis with the Common
Stock of the Company. No future grants of options under the 1987 Plan will be
made. Options granted prior to August 31, 1994 expire ten years from the date of
grant. Options granted subsequent to August 31, 1994 expire five years from the
date of grant. Options automatically expire thirty days after termination of
employment.

     In April 1995, the Company and its shareholders adopted a Stock Option Plan
(the "1995 Plan"). Under the 1995 Plan, awards of any combination of incentive
stock options, nonqualified stock options, restricted stock, stock appreciation
rights and performance shares may be granted to executives and key employees to
purchase 415,000 shares of the Company's Common Stock. An additional 150,000
awards were authorized for grant in September of 1998.

     Incentive stock options shall be no less than 100% of the fair market value
of the Company's Common Stock on the date of grant (110% if granted to an
employee who owns 10% or more of the Common Stock). No incentive stock option
may be granted to anyone other than a full-time employee of the Company. Options
expire ten years after the date of grant and automatically expire ninety days
after termination of employment.

                                       31
<PAGE>   32
                         ALIGN-RITE INTERNATIONAL, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     A summary of the status of the Company's stock options as of March 31,
1999, 1998 and 1997, and the changes during the years ended on those dates, are
presented below:

<TABLE>
<CAPTION>
                                         1999                    1998                    1997
                                 --------------------    --------------------    --------------------
                                            WEIGHTED                WEIGHTED                WEIGHTED
                                 NUMBER      AVERAGE     NUMBER      AVERAGE     NUMBER      AVERAGE
                                   OF       PRICE PER      OF       PRICE PER      OF       PRICE PER
                                 SHARES       SHARE      SHARES       SHARE      SHARES       SHARE
                                 -------    ---------    -------    ---------    -------    ---------
<S>                              <C>        <C>          <C>        <C>          <C>        <C>
Balance, beginning.............  564,075     $ 4.21      547,762     $ 2.83      596,521     $ 2.43
Options granted................   87,295     $12.71       58,500     $15.56       18,500     $11.30
Options canceled...............  (20,051)    $15.26       (1,015)    $ 2.20       (3,002)    $ 8.25
Options exercised..............  (68,592)    $ 2.38      (41,172)    $ 2.06      (64,257)    $ 1.31
                                 -------                 -------                 -------
Balance, end...................  562,727     $ 5.33      564,075     $ 4.21      547,762     $ 2.83
                                 =======                 =======                 =======
Options exercisable at
  year-end.....................  402,087     $ 4.13      417,307     $ 2.97      414,652     $ 2.11
                                 =======                 =======                 =======
Weighted average fair value of
  options granted during the
  year.........................              $ 9.86                  $ 9.02                  $ 4.32
                                             ======                  ======                  ======
Options available for grant....  156,927
                                 =======
</TABLE>

     The following table summarizes information about stock options outstanding
at March 31, 1999:

<TABLE>
<CAPTION>
                                                            OUTSTANDING                 EXERCISABLE
                                                  --------------------------------   ------------------
                                                             WEIGHTED
                                                              AVERAGE     WEIGHTED             WEIGHTED
                                                             REMAINING    AVERAGE              AVERAGE
                                                            CONTRACTUAL   EXERCISE             EXERCISE
              EXERCISE PRICE RANGE                SHARES       LIFE        PRICE     SHARES     PRICE
              --------------------                -------   -----------   --------   -------   --------
<S>                                               <C>       <C>           <C>        <C>       <C>
$0 to $5.00.....................................  392,561       4.0        $ 2.22    314,583    $ 1.94
$5.01 to $10.00.................................   27,171       7.0        $ 8.31     26,671    $ 8.29
$10.01 to $15.00................................  108,995       9.0        $12.45     43,165    $12.56
$15.01 to $20.00................................   34,000       8.5        $16.14     17,668    $16.18
                                                  -------                            -------
  $0 to $20.00..................................  562,727       5.4        $ 5.33    402,087    $ 4.13
                                                  =======                            =======
</TABLE>

     The fair value of options granted during 1999, 1998 and 1997 approximated
$861,000, $323,000 and $196,000, respectively, on the dates of grants using the
Black-Scholes option-pricing model with the following assumptions: (i) divided
yield of 0%, (ii) expected volatility of 62%, 61% and 40% for 1999, 1998 and
1997, respectively, (iii) weighted average risk-free interest rates of 5.25%, a
range between 6.1% to 6.6% and 6.5% for 1999, 1998 and 1997, respectively, (iv)
weighted average expected life of 10.0, 5.0 and 5.0 years for 1999, 1998 and
1997, respectively and (v) assumed forfeiture rate of 0%, 1% and 1% for 1999,
1998 and 1997, respectively.

                                       32
<PAGE>   33
                         ALIGN-RITE INTERNATIONAL, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     Had compensation costs for the Company's stock option and purchase plans
been determined based upon the methodology prescribed under SFAS No. 123, the
Company's net income and earnings per share would have been adjusted to the pro
forma amounts below:

<TABLE>
<CAPTION>
                                                              UNAUDITED
                                                              PRO FORMA
                                                              ----------
<S>                                                           <C>
Year Ended March 31, 1999
  Net income................................................  $4,434,457
  Basic earnings per share..................................        0.99
  Diluted earnings per share................................        0.91
Year Ended March 31, 1998
  Net income................................................  $5,636,065
  Basic earnings per share..................................        1.27
  Diluted earnings per share................................        1.16
Year Ended March 31, 1997
  Net income................................................  $5,128,821
  Basic earnings per share..................................        1.17
  Diluted earnings per share................................        1.07
</TABLE>

     The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts, and additional awards in future years are
anticipated.

     Options granted in connection with the 1987 Plan and 1995 Plan were at
exercise prices denominated in British pounds and U.S. dollars, respectively.
The price per share for options issued prior to April 1, 1995, in terms of U.S.
dollars, using the March 31, 1997 exchange rate, ranged from $.82 to $2.82.

     On July 25, 1995, the Company granted 111,396 options at an exercise price
of $3.32 per share to the Chairman and Chief Executive Officer which vest at a
rate of 10% per year except the last installment which vests 60 days prior to
the tenth anniversary of the grant. Additionally, any unvested options will
automatically vest in the event of death, disability, termination without cause,
or if a change-in-control occurs. The difference between the option grant price
and the fair market value of the Common Stock at the date of grant (total of
$1,106,160) will be charged to operations at a rate of 10% per year.

     The Company has reserved 719,654 shares of Common Stock for issuance upon
the exercise of options.

13. CONCENTRATION OF CREDIT RISK:

     Financial instruments which subject the Company to concentrations of credit
risk consist primarily of cash and cash equivalents and trade accounts
receivable.

     The Company maintains cash and cash equivalents with various domestic and
foreign financial institutions. The Company performs periodic evaluations of the
relative credit standing of these institutions. From time to time, United States
cash balances may exceed Federal Deposit Insurance Corporation insurance limits.
No such deposit insurance is provided for deposits with foreign institutions.

                                       33
<PAGE>   34
                         ALIGN-RITE INTERNATIONAL, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     The Company's customers are concentrated in the United States and Europe,
primarily within the high technology industry. The Company establishes an
allowance for doubtful accounts based upon factors surrounding the credit risk
of customers, historical trends and other information and, to date, such losses
have been within management's expectations. During the years ended March 31,
1999, 1998 and 1997, net sales, as a percentage of consolidated net sales, of
its largest customers is as follows:

<TABLE>
<CAPTION>
                                      1999                         1998                         1997
                           --------------------------   --------------------------   --------------------------
                                        PERCENTAGE OF                PERCENTAGE OF                PERCENTAGE OF
                             AMOUNT       NET SALES       AMOUNT       NET SALES       AMOUNT       NET SALES
                           ----------   -------------   ----------   -------------   ----------   -------------
<S>                        <C>          <C>             <C>          <C>             <C>          <C>
Customer A...............  $4,951,045         9.4%      $4,159,612        8.9%       $5,253,000       13.8%
Customer B...............   3,743,562         7.1%       3,748,399        8.0%        2,458,000        6.5%
Customer C...............   3,669,631         7.0%       3,650,696        7.8%        2,382,000        6.3%
                                            -----                        ----                         ----
                                             23.5%                       24.7%                        26.6%
                                            =====                        ====                         ====
</TABLE>

14. SEGMENT INFORMATION

     As described in Note 2, the Company adopted SFAS No. 131 in fiscal year
1999. The Company has two reportable business segments: the United States and
Europe.

     The Company conducts operations worldwide and is managed on a geographical
basis, with those geographic segments being the United States and Europe. The
United States segment, which is based in Burbank, California, covers the U.S.,
Canada and Latin America. The European segment, which is based in Bridgend,
Wales and Heilbronn, Germany, covers all European countries. Sales to Asia
Pacific from both segments are immaterial to the group and therefore, not deemed
a separate segment. The Company's operations are primarily concentrated in the
United States and Europe.

     The accounting policies of the geographic segments are the same as those
described in the summary of significant accounting policies. The Company
allocates resources to and evaluates performance of its geographic segments
based on operating income. Transfers between geographic areas have not been
significant and are recorded using internal transfer prices set by the Company.

<TABLE>
<CAPTION>
                                                    FOR FISCAL YEAR MARCH 31, 1999
                                              -------------------------------------------
                                              UNITED STATES      EUROPE          TOTAL
                                              -------------    -----------    -----------
<S>                                           <C>              <C>            <C>
Net revenue from unaffiliated customers.....   $29,649,805     $22,792,715    $52,442,520
                                               ===========     ===========    ===========
Income from operations......................   $ 3,820,662     $ 4,675,647    $ 8,496,309
                                               ===========     ===========    ===========
Depreciation and amortization...............   $ 2,955,000     $ 3,034,157    $ 5,989,157
                                               ===========     ===========    ===========
Long-lived assets...........................   $33,238,531     $28,903,192    $62,141,723
                                               ===========     ===========    ===========
Identifiable assets.........................   $42,039,081     $38,252,557    $80,291,638
                                               ===========     ===========    ===========
</TABLE>

<TABLE>
<CAPTION>
                                                    FOR FISCAL YEAR MARCH 31, 1998
                                              -------------------------------------------
                                              UNITED STATES      EUROPE          TOTAL
                                              -------------    -----------    -----------
<S>                                           <C>              <C>            <C>
Net revenue from unaffiliated customers.....   $27,467,497     $19,253,557    $46,721,054
                                               ===========     ===========    ===========
Income from operations......................   $ 4,378,444     $ 5,155,605    $ 9,534,049
                                               ===========     ===========    ===========
Depreciation and amortization...............   $ 2,525,601     $ 1,754,953    $ 4,280,554
                                               ===========     ===========    ===========
Long-lived assets...........................   $20,972,311     $13,517,679    $34,489,990
                                               ===========     ===========    ===========
Identifiable assets.........................   $28,697,454     $22,430,708    $51,128,162
                                               ===========     ===========    ===========
</TABLE>

                                       34
<PAGE>   35
                         ALIGN-RITE INTERNATIONAL, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

<TABLE>
<CAPTION>
                                                    FOR FISCAL YEAR MARCH 31, 1997
                                              -------------------------------------------
                                              UNITED STATES      EUROPE          TOTAL
                                              -------------    -----------    -----------
<S>                                           <C>              <C>            <C>
Net revenue from unaffiliated customers.....   $25,868,264     $12,132,333    $38,000,597
                                               ===========     ===========    ===========
Income from operations......................   $ 4,930,530     $ 3,134,604    $ 8,065,134
                                               ===========     ===========    ===========
Depreciation and amortization...............   $ 1,765,281     $ 1,008,665    $ 2,773,946
                                               ===========     ===========    ===========
Long-lived assets...........................   $13,522,995     $ 8,566,077    $22,089,072
                                               ===========     ===========    ===========
Identifiable assets.........................   $24,867,768     $13,912,904    $38,780,672
                                               ===========     ===========    ===========
</TABLE>

15. QUARTERLY FINANCIAL SUMMARY -- UNAUDITED

<TABLE>
<CAPTION>
                                                                      QUARTERS
                                                      ----------------------------------------
          FOR THE YEARS ENDED MARCH 31,                FIRST     SECOND      THIRD     FOURTH
          -----------------------------               -------    -------    -------    -------
                                                         (THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                   <C>        <C>        <C>        <C>
1999
Revenues..........................................    $13,690    $13,993    $12,082    $12,677
Gross profit......................................      5,138      5,360      3,612      3,923
Income before provision for income taxes..........      2,870      2,907      1,185      1,410
Net income                                              1,785      1,811        805        903
Earnings per share:
  Basic...........................................    $  0.40    $  0.40    $  0.18    $  0.20
  Diluted.........................................       0.36       0.37       0.17       0.19
1998
Revenues..........................................    $10,616    $11,424    $11,689    $12,992
Gross profit......................................      4,130      4,293      4,349      4,713
Income before provision for income taxes..........      2,340      2,390      2,377      2,681
Net income........................................      1,448      1,491      1,480      1,682
Earnings per share:
  Basic...........................................    $  0.33    $  0.34    $  0.34    $  0.38
  Diluted.........................................       0.33       0.31       0.30       0.34
</TABLE>

16. SUBSEQUENT EVENT -- UNAUDITED

     On May 24, 1999, the Company signed a non-binding letter of intent to
purchase Harris Corporation's Imaging Technology Group (ITG) semiconductor
business unit, a photomask manufacturer located in Melbourne, Florida. The
acquisition is subject to a number of conditions, including the preparation,
negotiation and approval of a definitive agreement, satisfactory completion of
due diligence, obtaining required regulatory and other approvals, and final
agreement on the financial terms of the transaction terms of the agreement have
not been disclosed.

                                       35
<PAGE>   36

       REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE

To the Board of Directors and Shareholders of Align-Rite International, Inc.

     Our report on the consolidated financial statements of Align-Rite
International, Inc. and its subsidiaries is included on page 18 of this Form
10-K. In connection with our audits of such financial statements, we have
audited the related financial statement schedule as of March 31, 1999, 1998 and
1997 and for each of the three years in the period ended March 31, 1999, as
included on page 17 of this Form 10-K.

     In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.

PricewaterhouseCoopers LLP

Los Angeles, California
May 28, 1999

                                       36
<PAGE>   37

                SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
                                              BALANCE AT     CHARGED    CREDITED TO   DEDUCTIONS   BALANCE AT
                                             BEGINNING OF   COSTS AND      OTHER         FROM        END OF
                                                PERIOD      EXPENSES     ACCOUNTS      RESERVES      PERIOD
                                             ------------   ---------   -----------   ----------   ----------
<S>                                          <C>            <C>         <C>           <C>          <C>
Year ended March 31, 1999
  Allowance for doubtful receivables.......    $278,495     $179,662           --           --      $458,157
  Deferred tax asset valuation allowance...    $ 29,372           --           --      $29,372      $     --
Year ended March 31, 1998
  Allowance for doubtful receivables.......    $271,493     $  7,002           --           --      $278,495
  Deferred tax asset valuation allowance...    $ 26,000     $  3,372           --           --      $ 29,372
Year ended March 31, 1997
  Allowance for doubtful receivables.......    $152,633           --     $118,860           --      $271,493
  Deferred tax asset valuation allowance...    $ 26,000           --           --           --      $ 26,000
</TABLE>

                                       37
<PAGE>   38

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

     None.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     Information required under this Item is incorporated by reference from the
Company's definitive Proxy Statement to be filed in connection with the
Company's 1999 annual meeting of shareholders. Reference is made to that portion
of the Proxy Statement entitled "Election of Directors." In addition,
information regarding executive officers of the Company is set forth under the
caption "Executive Officers of the Registrant" in Part I hereof.

ITEM 11. EXECUTIVE COMPENSATION AND RELATED MATTERS

     Information required under this Item is incorporated by reference from the
Company's definitive Proxy Statement to be filed in connection with the
Company's 1999 annual meeting of shareholders. Reference is made to that portion
of the Proxy Statement entitled "Executive Compensation and Other Information."

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     Information required under this Item is incorporated by reference from the
Company's definitive Proxy Statement to be filed in connection with the
Company's 1999 annual meeting of shareholders. Reference is made to that portion
of the Proxy Statement entitled "Security Ownership of Principal Shareholders
and Management."

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Information required under this Item is incorporated by reference from the
Company's definitive Proxy Statement to be filed in connection with the
Company's 1999 annual meeting of shareholders. Reference is made to that portion
of the Proxy Statement entitled "Executive Compensation and Other Information"
and "Certain Transactions."

                                    PART IV

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

     1. FINANCIAL STATEMENTS

     Financial Statements of the Registrant are listed in the index to
Consolidated Financial Statements and filed under Item 8, "Financial Statements
and Supplementary Data," included elsewhere in the Form 10-K.

     2. FINANCIAL STATEMENT SCHEDULE

     Financial Statement Schedule of the Registrant is listed in the index to
Consolidated Financial Statements and filed under Item 8, "Financial Statements
and Supplementary Data," included elsewhere in this Form 10-K.

     3. REPORT ON FORM 8-K

     None.

                                       38
<PAGE>   39

     4. EXHIBITS

<TABLE>
<CAPTION>
    EXHIBIT
    NUMBER                       DESCRIPTION OF EXHIBIT
    -------                      ----------------------
    <C>       <S>
       3.1    Articles of Incorporation of the Company, previously filed
              as Exhibit 3.1 to Registration Statement No. 33-91978, on
              Form S-1, which is incorporated herein by reference.
       3.2    Form of Amended and Restated Articles of Incorporation of
              the Company filed as Exhibit 3.2 to Registration Statement
              No. 33-91978, on Form S-1, which is incorporated herein by
              reference.
       3.3    Bylaws of the Company filed as Exhibit 3.3 to Registration
              Statement No. 33-91978, on Form S-1, which is incorporated
              herein by reference.
      10.1    Forms of Indemnity Agreement between the Company and each of
              its executive officers and directors filed as Exhibit 10.1
              to Registration Statement No. 33-91978, on Form S-1, which
              is incorporated herein by reference.
      10.2    Align-Rite International, Inc. Stock Option Plan filed as
              Exhibit 10.2 to Registration Statement No. 33-91978, on Form
              S-1, which is incorporated herein by reference.
      10.3    Letter of Advice of Borrowing Terms dated April 20, 1995,
              between National Westminster Bank and ARL, Letter of Credit
              dated September 15, 1994 between National Westminster Bank
              and ARL and Mortgage Debenture dated February 10, 1992
              between National Westminster Bank and ARL filed as Exhibit
              10.4 to Registration Statement No. 33-91978, on Form S-1,
              which is incorporated herein by reference.
      10.4    Lease dated January 18, 1980 between Walton Emmick and Form
              of Lease between ARC and Denise McLaughlan, Sharyn Schrick,
              and Sandra Bowman, for ARC's corporate headquarters located
              at 2428 Ontario Street, Burbank, California filed as Exhibit
              10.5 to Registration Statement No. 33-91978 on Form S-1,
              which is incorporated herein by reference.
      10.5    Lease dated April 12, 1995 between Shire Family Trusts and
              ARC, for part of ARC's corporate headquarters located at
              2504 Ontario Street, Burbank, California filed as Exhibit
              10.6 to Registration Statement No. 33-91978 on Form S-1,
              which is incorporated herein by reference.
      10.6    Agreement dated May 30, 1984 between MGC and ARL under Lease
              dated May 30, 1984 between MGC and ARL and Agreement
              relating to the Leasehold Property dated March 24, 1992, for
              headquarters located at 1 Technology Drive, Bridgend, Wales,
              U.K. filed as Exhibit 10.7 to Registration Statement No.
              33-91978 on Form S-1, which is incorporated herein by
              reference.
      10.7    Master Equipment Sub-Lease Agreement dated May 30, 1984
              between MGC and ARL, Agreement dated March 24, 1992 between
              MGC, ARL and ARI and Lease Payment Restructuring Agreement
              dated January 27, 1994 between MGC, ARL and ARI filed as
              Exhibit 10.8 to Registration Statement No. 33-91978 on Form
              S-1, which is incorporated herein by reference.
      10.8    Shareholders Agreement dated May 30, 1984 between MGC, the
              several persons listed on Schedule 1 attached thereto and
              ARC and Supplemental Shareholders Agreement dated March 26,
              1986 between MGC and ARI filed as Exhibit 10.9 to
              Registration Statement No. 33-91978 on Form S-1, which is
              incorporated herein by reference.
</TABLE>

                                       39
<PAGE>   40

<TABLE>
<CAPTION>
    EXHIBIT
    NUMBER                       DESCRIPTION OF EXHIBIT
    -------                      ----------------------
    <C>       <S>
      10.9    Form of Debenture dated March 16, 1988 between ARI and each
              of WGTC Nominees Limited, Prutec Limited, F&C Enterprise
              Trust PLC, H&Q Ventures IV, H&Q Ventures International IV
              and Hamquist (the "Loan Parties"), and Form of Deed of
              Amendment dated December 24, 1990 between ARI and each of
              the Loan Parties, with a Schedule attached hereto listing
              debenture amounts for each of the Loan Parties filed as
              Exhibit 10.10 to Registration Statement No. 33-91978 on Form
              S-1, which is incorporated herein by reference.
     10.10    Letters dated October 12, 1993 and October 18, 1994 from the
              Secretary of State for Wales ("Wales") to ARL for Grants to
              ARL, Notification Letter dated April 21, 1995 from
              PricewaterhouseCoopers LLP to Wales and Consent Letter dated
              April 24, 1995 from Wales to ARL filed as Exhibit 10.11 to
              Registration Statement No. 33-91978 on Form S-1, which is
              incorporated herein by reference.
     10.11    Employment Agreement dated March 31, 1995 between James L.
              Mac Donald and the Company filed as Exhibit 10.12 to
              Registration Statement No. 33-91978 on Form S-1, which is
              incorporated herein by reference.
     10.13    The Rules and Ancillary Documentation for Align-Rite
              International, Plc Employee Share Option Scheme, as amended,
              filed as Exhibit 10.14 to Registration Statement No.
              33-91978, on Form S-1, which is incorporated herein by
              reference.
     10.14    Strategic Relationship Agreement, dated April 1, 1993, among
              Harris and ARI, ARC and ARL filed as Exhibit 10.15 to
              Registration Statement No. 33-91978, on Form S-1, which is
              incorporated herein by reference.
     10.15    ETEC Core System Purchase Agreement between Etec Systems,
              Inc. and filed as Exhibit 10.16 to Registration Statement
              No. 33-91978, on Form S-1, which is incorporated herein by
              reference.
     10.16    Align-Rite International, Inc. Employee Stock Purchase Plan
              filed as Exhibit 10.1 to Registration Statement No. 33-00232
              on Form S-8, which is incorporated herein by reference.
     10.17    1998 Credit Agreement -- Align-Rite
              Corporation -- Align-Rite Corporation 1998 Credit Agreement
              filed as Exhibit 10.17 to Align-Rite International, Inc.
              Annual Report on Form 10-K for the year ended March 31,
              1998, which is incorporated herein by reference.
     10.18    Amendment of Commercial Credit Agreements -- Align-Rite
              International, Inc. -- Align-Rite International, Inc.
              Amendment of Commercial Credit Agreements filed as Exhibit
              10.18 to Align-Rite International, Inc. Annual Report on
              Form 10-K for the year ended March 31, 1998, which is
              incorporated herein by reference.
        21    Subsidiaries of the Registrant.
        23    Consent of PricewaterhouseCoopers LLP.
        27    Financial Data Schedule
</TABLE>

                                       40
<PAGE>   41

                                   SIGNATURES

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

                                          ALIGN-RITE INTERNATIONAL, INC.

Date: June 29, 1999                       By:    /s/ JAMES L. MAC DONALD
                                            ------------------------------------
                                                    James L. Mac Donald
                                              Chairman of the Board, President
                                                and Chief Executive Officer

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

<TABLE>
<C>                                                       <S>

                /s/ JAMES L. MAC DONALD                   Date: June 29, 1999
--------------------------------------------------------
                  James L. Mac Donald
          Chairman of the Board, President and
                Chief Executive Officer

                 /s/ PETAR N. KATURICH                    Date: June 29, 1999
--------------------------------------------------------
                   Petar N. Katurich
                Vice President Finance,
                Chief Financial Officer,
                 Secretary and Director

                    /s/ GEORGE WELLS                      Date: June 29, 1999
--------------------------------------------------------
                      George Wells
                        Director

                   /s/ WILLIAM ELDER                      Date: June 28, 1999
--------------------------------------------------------
                     William Elder
                        Director

                    /s/ ALAN DUNCAN                       Date: June 29, 1999
--------------------------------------------------------
                      Alan Duncan
                        Director
</TABLE>

                                       41