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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------
 
   
                                  FORM 10-K/A
    
                ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                      THE SECURITIES EXCHANGE ACT OF 1934
 
                     FOR THE FISCAL YEAR ENDED MAY 31, 1998
                         COMMISSION FILE NUMBER 0-26784
 
                          SPEEDFAM INTERNATIONAL, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
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<S>                                            <C>
                   ILLINOIS                                      36-2421613
       (STATE OR OTHER JURISDICTION OF                        (I.R.S. EMPLOYER
        INCORPORATION OR ORGANIZATION)                      IDENTIFICATION NO.)
 
            305 NORTH 54TH STREET                                  85226
              CHANDLER, ARIZONA                                  (ZIP CODE)
   (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
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                 REGISTRANT'S TELEPHONE NUMBER: (602) 705-2100
 
       SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:  NONE
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
 
                           COMMON STOCK, NO PAR VALUE
                                (TITLE OF CLASS)
 
     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.  [X]
 
     State the aggregate market value of the voting stock held by non-affiliates
of the registrant: $204,565,619 as of August 21, 1998.
 
     Indicate the number of shares outstanding of each of the issuer's classes
of common stock: 16,118,206 as of August 21, 1998.
 
                      DOCUMENTS INCORPORATED BY REFERENCE:
 
     Part III, Proxy Statement relating to 1998 Annual Meeting of Shareholders
(except for the Report of the Compensation Committee of the Board of Directors
and the Performance Graph).
 
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                               TABLE OF CONTENTS
 
   
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ITEM NO.                             CAPTION                                 PAGE
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<C>        <S>                                                           <C>
                                        PART I
    1.     Business....................................................        3
    2.     Properties..................................................       15
    3.     Legal Proceedings...........................................       15
    4.     Submission of Matters to a Vote of Security Holders.........       16
 
                                       PART II
    5.     Market for Common Equity and Related Shareholder Matters....       16
    6.     Selected Financial Data.....................................       16
    7.     Management's Discussion and Analysis of Financial Condition
             and Results of Operations.................................       17
    7A.    Quantitative and Qualitative Disclosures about Market
             Risk......................................................       28
    8.     Financial Statements and Supplementary Data.................       29
    9.     Changes in and Disagreements with Accountants on Accounting
             and Financial Disclosure..................................       69
 
                                       PART III
   10.     Directors and Executive Officers of the Company.............       69
   11.     Executive Compensation......................................       69
   12.     Security Ownership of Certain Beneficial Owners and
             Management................................................       69
   13.     Certain Relationships and Related Transactions..............       69
 
                                       PART IV
   14.     Exhibits, Financial Statement Schedules, and Reports on Form
             8-K.......................................................       69
           Signatures..................................................       70
           List of Exhibits............................................  Exhibit Index
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ITEM 1.  BUSINESS
 
     SpeedFam International, Inc. (the "Company") was incorporated in Illinois
in 1959 as SpeedLap Corporation. SpeedFam International, Inc. is a holding
company operating through three wholly owned subsidiaries, and also owns
interests in two joint ventures. The Company operates through SpeedFam
Corporation in the U.S. ("SpeedFam U.S.") and SpeedFam Limited ("SpeedFam U.K.")
and SpeedFam GmbH ("SpeedFam Germany") in Europe. SpeedFam International, Inc.
owns 50% of each of two joint ventures, SpeedFam Co., Ltd. (together with its
subsidiaries and joint ventures, the "Far East Joint Venture") and Fujimi
Corporation (the "Fujimi Joint Venture"). The Far East Joint Venture primarily
produces and sells products in the Far East similar to those produced by the
Company, and the Fujimi Joint Venture sells slurries and pads primarily in North
America.
 
     Unless the context otherwise requires, the "Company" and "SpeedFam" refer
only to SpeedFam International, Inc., an Illinois corporation, and its wholly
owned subsidiaries. The Company's principal executive offices are located at 305
North 54th Street, Chandler, Arizona 85226 and its telephone number is (602)
705-2100.
 
     The Company designs, develops, manufactures, markets and services chemical
mechanical planarization, or "CMP," systems used in the fabrication of
semiconductor devices as well as other high throughput precision surface
processing systems used in the fabrication of thin film memory disk media,
semiconductor wafers and general industrial components. In addition, the Company
markets and distributes slurries and parts and expendables used in its
customers' manufacturing processes. The Company's processing systems include
polishing, grinding, lapping, and pre-deposition cleaning equipment.
 
JOINT VENTURES
 
     Since 1971, the Company has owned a 50% interest in the Far East Joint
Venture. The remaining 50% is owned by Obara Corporation, a publicly-traded
Japanese company that supplies products to the automotive industry. Generally,
the Far East Joint Venture designs, produces and markets in the Far East
equipment similar to that produced by the Company in the U.S. In 1971, the
Company decided that the most effective method to penetrate the Japanese market
was with a Japanese partner. See "Joint Venture Arrangements -- Far East Joint
Venture." In 1984, the Company established the Fujimi Joint Venture with Fujimi
Incorporated, a publicly-traded Japanese manufacturer of slurries. The Fujimi
Joint Venture sells slurries manufactured by Fujimi Incorporated, a dominant
supplier and distributor of slurries in the Far East region, primarily to
silicon wafer, thin film memory disk and general industrial manufacturers in
North and South America. See "-- Manufacturing and Suppliers" and "Joint Venture
Arrangements -- Fujimi Joint Venture."
 
PRODUCTS
 
     SpeedFam's products include polishing, grinding and lapping equipment and
systems; cleaning systems; other high precision surface processing equipment;
and certain other products used in its customers' manufacturing process,
including slurries. During fiscal years 1998, 1997 and 1996, 84.5%, 84.8% and
78.5%, respectively, of the Company's total revenue (including commissions) was
attributable to the sale of capital equipment, parts and expendables and 15.5%,
15.2% and 21.5%, respectively, of the Company's total revenue was attributable
to sales of slurries.
 
     Applications.  Polishing is a process used to change the characteristics of
the surface of a semiconductor wafer or thin film memory disk. Polishing is a
complex science, often involving multiple steps, each at a specified set of
process parameters such as polishing speed, pressure, time, and temperature, as
well as slurry pH and particle size, hardness and shape. Polishing improves the
flatness (planarity), smoothness and optical properties of a surface. One
typical flat polishing system consists of a moving platen that is covered with a
polishing pad, in combination with a polishing liquid (or slurry) containing
abrasive particles that impinge on the surface, thereby creating the desired
surface qualities. This liquid slurry can be chemically active such that the
surface of the component being polished is chemically modified, thus
accelerating and improving the polishing process. The combination of chemical
action from the acidic or alkaline slurry and mechanical
 
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action from the abrasive slurry is used to process silicon wafers, thin film
memory disk media and advanced semiconductor devices.
 
     Processes similar to polishing include lapping (a process where no
polishing pad is used and the workpiece is pressed into the slurry which is
applied to a cast-iron lapping wheel) and free abrasive machining ("FAM," a
process similar to lapping except that instead of a cast iron wheel, a high
alloy hardened steel wheel is used). Lapping and free abrasive machining result
in higher removal rates than polishing but produce rougher surface finishes.
Grinding is a conventional machining process in which abrasive particles are
contained within a fixed medium (grinding stone), rather than a liquid. Grinding
results in much higher removal rates than lapping but produces a coarser surface
finish. Dimensional tolerance, surface finish, quantity of material to be
removed along with production rates required and cost of operation are the
primary variables considered in the determination of the best process for a
specific application. Polishing and other surface treatment processes are
typically followed by a cleaning process. Semiconductor and thin film memory
disk cleaning systems offered by SpeedFam incorporate one or more of the
following features: ultrasonics, PVA (polyvinyl alcohol) brush scrubbing,
rinsing and drying in a Class 1 cleanroom-compatible system.
 
EQUIPMENT
 
     Semiconductor Chemical Mechanical Planarization (CMP).  The Company's
Auriga system is a five head, two polishing table CMP system capable of
processing 65-90 wafers per hour based on a two-minute polishing cycle. The
Auriga system, which began shipping commercially in November 1996, incorporates
certain modifications from the Company's original system for chemical mechanical
planarization of semiconductor devices, the CMP-V which first shipped in 1994.
These modifications include changes to the control and automation system in
order to decrease the time interval between processes, thereby increasing the
number of wafers processed. The Company's CMP process is currently characterized
and in production for oxide and metal (tungsten) applications. The system
incorporates full cassette-to-cassette automation. Robotics remove the wafers
from the cassette and place them into the buffer tray. The wafers are then
staged for batch pickup by the polishing heads. Once secured by the polishing
heads, the wafers are moved onto the primary polishing pad and the process is
initiated. The polishing table, covered with a flat polishing pad, rotates at a
variable speed throughout the polishing cycle. Upon completion of the initial
polish, the wafers are transported either to a rinsing station or to a second
polishing table for an additional polishing or buffing step. The wafers are then
rinsed and placed into the output buffer tray, scrubbed on both sides with a wet
PVA brush and placed wet into the output cassettes. The system is self-enclosed,
and has its own air filtration and air flow management system. The Auriga offers
compatibility with all commonly used slurry chemistries.
 
     In fiscal year 1998, the Company introduced the Auriga-C, which integrates
cleaning and drying technology into the Company's CMP system thereby providing a
complete dry-in/dry-out system. The design of the Auriga-C is based upon the
replacement of the automation module on the Auriga with a new automation module
which incorporates the cleaning technology. The Auriga-C, the Auriga and the
CMP-V are produced solely by the Company.
 
     Thin Film Memory Disk Media.  The Company sells polishing machines,
pre-deposition cleaning machines and grinding machines for producing aluminum,
nickel-plated and alternative substrates for the thin film memory disk media
market.
 
     The DSM line of manual and automated machines are used in the manufacture
of thin film memory disk media for grinding and polishing. The DSM line of
machines simultaneously processes both sides of a disk substrate and is
available in various sizes. The automated machines in the DSM line are currently
manufactured solely by the Far East Joint Venture.
 
     The MD line of cleaning systems are used to clean the substrate at various
stages of the manufacturing process, including the critical cleaning immediately
prior to the deposition of the magnetic layers. Disk cleaning systems
distributed by the Company are currently produced solely by the Far East Joint
Venture.
 
     Semiconductor Wafers.  The Company supplies chemical mechanical polishing,
double-sided lapping and edge polishing systems to the semiconductor substrates
market.
 
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     The Company's DSM line of double-sided lapping systems is available in
various sizes and is used to create the initial flatness and thickness of the
silicon wafer after it is sliced from an ingot. The lapping process removes saw
marks remaining after slicing and provides a surface finish suitable for
subsequent polishing processes. DSM double sided polishers for silicon wafer
polishing are also available.
 
     The SPAW line utilizes a chemical mechanical polishing process to remove
the shallow damage layer remaining from previous process steps and to attain the
specified flatness and surface finish. A 50-inch model is manufactured by the
Company in the U.S. and a 59-inch model suitable for automated processing is
manufactured by the Far East Joint Venture.
 
     The edge polishing technology was developed and introduced for the purpose
of making the wafer's edge easier to clean, thereby increasing semiconductor
device manufacturing yields. The Far East Joint Venture produces the EP line of
edge polishing systems that is marketed and distributed by the Company.
 
     General Industrial.  The Company offers a broad line of lapping, grinding
and polishing systems for the general industrial market. The line includes
approximately 35 models of single-side processing machines, double-side
processing machines, in-line grinding systems and optics polishing machines. The
product offering is available in a wide range of sizes from a 12 inch plate
diameter up to a 150 inch plate diameter. Each system typically consists of a
specialized machining plate, a rotating spindle, a means to fix and apply
pressure to the workpieces, an abrasive distribution system and a control
system.
 
PARTS AND EXPENDABLES
 
     The Company markets a broad line of parts and expendables. These products
include general spare parts, bearings, grinding stones, lapping plates,
workpiece carriers, seals, retaining rings, workholders and polishing pads.
These products are typically obtained from outside vendors and are generally
manufactured to the Company's specifications. The Company maintains spare parts
inventories at 8 U.S. locations, 4 European locations, and 2 locations in the
Far East. The Company believes that its ability to quickly supply parts and
expendables is an important factor in its ability to provide customers with a
total solution.
 
SLURRIES
 
     The Company offers a broad line of slurry and slurry components (including
vehicles and abrasives) used in surface preparation processes as part of a total
process solution. Polishing slurry consists of abrasive particles contained in a
liquid vehicle that may contain a suspension agent and may be chemically active.
The slurries marketed by the Company are used by manufacturers of thin film
memory disk media, semiconductor wafers and other products as part of their
polishing processes. Substantially all of the slurries sold by the Company are
manufactured by Fujimi Incorporated.
 
     The Company has entered into a joint venture (the "Fujimi Joint Venture")
with Fujimi Incorporated to sell certain products in North and South American
markets, including slurry and slurry components. The Company distributes thin
film memory disk polishing slurry and related products supplied by Fujimi
Incorporated, while the Fujimi Joint Venture distributes other products supplied
by Fujimi Incorporated. See "Joint Venture Arrangements -- Fujimi Joint
Venture."
 
     The slurry for thin film memory disk media polishing applications is
available in different varieties to address the varying needs of each specific
process. Some formulations allow higher stock removal rates and others emphasize
surface finish results. There are also a variety of slurry formulations
available for silicon wafer processing. Slurry is an essential process component
in chemical mechanical polishing. The chemical action of this process is
implemented by designing the slurry to be chemically active with the surface to
be polished, typically by adjusting the pH of the slurry vehicle. The mechanical
portion of the process is accomplished by abrasive particles in the slurry.
 
     The Company believes that meeting the evolving slurry requirements of each
customer is vital to providing a total process solution. The Company intends to
continue to maintain an emphasis on slurry distribution and to work closely with
Fujimi Incorporated in developing, designing and formulating customized slurries
that address specific customer needs.
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CUSTOMERS
 
     The Company sells its products to leading manufacturers of semiconductor
devices, thin film memory disks, semiconductor wafers and for various general
industrial applications. Certain of the Company's top customers in fiscal 1998,
1997 and 1996 in the semiconductor device, thin film memory disk media,
semiconductor wafer and general industrial application markets are listed below:
 
          SEMICONDUCTOR DEVICE: AMD; Hewlett-Packard; Lucent; National
     Semiconductor; Promos Technology; Rockwell; Samsung; Siemens; White Oak
     Semiconductor.
 
          THIN FILM MEMORY DISK MEDIA: HMT; Hyundai; IBM; Komag; Max Media;
     Seagate.
 
          SEMICONDUCTOR WAFER: MEMC; Mitsubishi Silicon America; S.E.H.;
     Sumitomo Sitix; Wacker Siltronic.
 
          GENERAL INDUSTRIAL APPLICATIONS: Caterpillar; Eaton; Hayward Quartz;
     Heraeus Amersil; IBM; Manufacturing Technology; Motorola; Vickers.
 
     One customer, Komag, accounted for 10.3% and 17.8% of the Company's total
revenue in fiscal years 1997 and 1996, respectively. AMD accounted for 12.8% of
the Company's total revenue for 1997. No customer accounted for 10.0% or more of
the Company's total revenue in fiscal year 1998. The Company's ten largest
customers accounted for 56.1%, 59.8% and 64.4% of the Company's total revenue in
fiscal years 1998, 1997 and 1996, respectively.
 
SALES AND MARKETING
 
     The Company markets and sells its products in North America through a
combination of direct sales personnel and distributors. The Company sells
directly to all the industries it serves and in addition uses a network of 13
regional distributors for its general industrial product lines. In its European
operations, the Company uses direct sales personnel and a small number of
distributors. The Company markets and sells its products in the Far East through
the sales and marketing arm of the Far East Joint Venture.
 
     The Company's sales strategy emphasizes direct interaction with customers,
particularly in the semiconductor and memory disk industries, where ongoing
customer support and service are critical. The Company's direct sales force is
divided into focused units for each of the semiconductor device, thin film
memory disk media, semiconductor wafer and general industrial products
industries.
 
     At May 31, 1998, the U.S. direct sales organization had a total of 23 sales
personnel. The Company's main sales offices are in Chandler, Arizona, Austin,
Texas and Elk Grove Village, Illinois. The Company also had an aggregate of nine
direct sales personnel in the SpeedFam U.K. and SpeedFam Germany offices. To
enhance its sales capabilities, the Company maintains process development and
demonstration laboratories in the U.S. and Europe. Sales and marketing
activities in the Far East are conducted by the Far East Joint Venture. See
"Joint Venture Arrangements -- Far East Joint Venture."
 
     The Company's marketing strategy includes involvement with SEMATECH, Inc.,
a consortium of major semiconductor manufacturers and equipment suppliers,
attendance at Semicon, Diskcon, IMTS and other trade shows worldwide and the
sponsorship of technical conferences, which include the presentation of
technical papers written by customers, university scientists and the Company's
own senior technologists. The Company believes these initiatives serve to
promote acceptance of the Company's products and process technologies in the
semiconductor, thin film memory disk and other industries.
 
CUSTOMER SERVICE AND SUPPORT
 
     The Company believes that providing highly responsive service is an
essential factor in providing a total solution to its customers. In order to
provide customers with experienced service and support personnel, the Company
has structured its service operations into distinct service units responsible
for each of the semiconductor device, thin film memory disk media, semiconductor
wafer and general industrial products industries. Elements of the Company's
customer service and support program include system installation and
 
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process certification, process support, machine repair, providing spare parts
inventories, internal training programs, external customer training,
documentation and formation of customer user groups. At May 31, 1998, the
Company had 197 service employees in the U.S. and Europe. For large users of the
Company's systems, the Company often creates a customized service arrangement
designed to meet the specific requirements of the customer.
 
     The Company generally provides a one year warranty on all equipment it
sells. Field service personnel provide warranty service, post-warranty service,
and equipment installations. Field service engineers are located in various
locations throughout the world, including dedicated site-specific engineers in
place at certain customer locations pursuant to contractual arrangements. The
Company also provides service and maintenance training as well as process
application training for its customers' personnel. The Company maintains an
extensive inventory of spare parts at its primary locations and at its satellite
service sites. This provides the Company the ability to provide same day or
overnight delivery for many parts.
 
BACKLOG
 
     Backlog of orders for capital equipment, parts, expendables and slurries
decreased to approximately $29.6 million at July 31, 1998, from approximately
$66.3 million at July 31, 1997. Approximately $17.1 million, or 57.6% of the
total backlog at July 31, 1998, was comprised of orders for capital equipment.
The Company's backlog does not include orders for capital equipment or other
products manufactured by the Far East Joint Venture and distributed by the
Company in the U.S. and Europe for which the Company receives commissions. The
Company includes in its backlog only those customer orders for which it has
accepted signed purchase orders with assigned delivery dates within 12 months.
Orders generally carry a stipulation that customers may incur a penalty in the
event of cancellation. However, there can be no assurance that orders will not
be canceled by customers or that the Company will obtain a meaningful penalty
payment. As a result of systems and equipment ordered and shipped in the same
quarter, possible changes in delivery schedules, occasional cancellation of
orders and delays in product shipments, the Company's backlog at any particular
date may not be indicative of actual sales for any succeeding period.
 
RESEARCH, DEVELOPMENT AND ENGINEERING
 
     The markets in which the Company competes are characterized by evolving
industry standards and frequent improvements in products and service. To compete
effectively in its markets, the Company must continually improve its products
and its process technologies and develop new technologies and products that
compete effectively on the basis of price and performance and that adequately
address current and future customer requirements. The Company's research,
development and engineering expenditures during fiscal 1998, 1997 and 1996, were
approximately $33.7 million, $19.8 million and $11.5 million, respectively.
 
     At May 31, 1998, the Company had an engineering staff of 49 employees and a
research and development staff of 113 employees. Because of the complex and
highly specialized design, testing and manufacturing requirements of the
Company, these employees must be experienced in a wide range of engineering
disciplines. The Company's philosophy is to maintain strong technical expertise
in each of its core competencies and to utilize consulting engineers for
non-critical portions of product development projects. The Company believes that
this approach provides flexibility and allows the Company to shorten time to
market for new products.
 
     Product Development.  In the first half of fiscal 1998, the Company
commenced sales of the Auriga-C. The Auriga-C is an enhanced version of the
Auriga system and integrates post-CMP cleaning and drying technology to provide
a complete dry-in/dry-out solution. The Company intends to periodically develop
and introduce enhanced versions of its CMP system. The Company is also
developing additional products and product enhancements for the thin film memory
disk and silicon wafer markets. Specifically, in fiscal 1999, the Company is
expected to introduce the Pegasus, a new grinding, lapping, and polishing system
for the thin film memory disk market. The Pegasus is configured for maximum
process control flexibility in aluminum grinding or nickel polishing
applications as well as lapping or polishing of alternative substrates such as
ceramic or glass. The Pegasus is designed for future retrofittable options such
as cassette-to-cassette automation and an
 
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advanced cleaning system. In addition, in the thin film memory disk area, the
Company continues to pursue the development of automated machines and enhanced
processes enabling lower head flying heights. For the silicon wafer market, the
Company introduced in fiscal 1998 a 300mm polisher and an enhanced edge
polishing system.
 
     Typically, the Company cultivates a "user-group" of current and potential
customers to act as technical advisors during the conceptualization of a new
product or a major product enhancement. The Company's CMP system was developed
in a similar manner and its development was assisted through technical
collaboration with and sponsorship by SEMATECH, Inc. and several SEMATECH, Inc.
member companies that are leaders in the use of CMP technology. From time to
time, the Company also engages in formal, funded joint development projects with
customers from the semiconductor and thin film memory disk industries as a means
to enhance its product development efforts.
 
     Process Development.  In addition to product development, the Company
continually seeks to enhance existing processes. The Company maintains process
development laboratories in both the U.S. and Europe that are staffed with
process engineers. The Company's process engineers frequently work directly with
customers' engineers, often working within the customers' facilities. The
Company is continuing to develop new processing capability in the CMP area for
additional film layers such as copper. The Company has also developed and
introduced an end-point detection metrology system for measuring the film
thickness of oxide and metal layers of advanced semiconductor devices. Although
the Company shipped the end-point detection system for revenue in fiscal 1998,
it continues to perfect the product's process applications. In addition, the
Company is developing 300mm planarization capabilities for its CMP systems.
 
MANUFACTURING AND SUPPLIERS
 
     The Company assembles its equipment and systems from components and
fabricated parts manufactured and supplied by others, including stainless steel
plates and gears, frames and weldments, power supplies, process controllers,
robots and polishing heads. Certain of the items manufactured by others are made
to the Company's specifications. All final assembly and system tests are
performed within the Company's manufacturing/assembly facilities. Quality
control is maintained through incoming inspection of components, in-process
inspection during equipment assembly and final inspection and operation of all
manufactured equipment prior to shipment. Substantially all of the Company's
non-CMP manufacturing is located in its Illinois facilities. The Company's CMP
system development and manufacturing are located at the Company's headquarters
in Chandler, Arizona.
 
     Certain of the components and sub-assemblies included in the Company's
products are obtained from a single supplier or limited group of suppliers. The
disruption or termination of these sources could have a material adverse effect
on the Company's operations. The Company is dependent upon Fujimi Incorporated,
a Japanese company, as the sole supplier of substantially all of the slurries
sold by the Company, consisting primarily of thin film memory disk polishing
slurry. Approximately 15.6%, 14.4% and 19.7% of the Company's total revenue in
fiscal 1998, 1997 and 1996, respectively, was derived from the sale of slurries
and other products supplied by Fujimi Incorporated. Accordingly, any disruption
in the supply provided by Fujimi Incorporated or in the overall relationship
between the Company and Fujimi Incorporated would have a material adverse effect
upon the Company. The Company has the exclusive right to distribute Fujimi
Incorporated thin film memory disk polishing slurry in North America until
October 1, 1999. See "Joint Venture Arrangements -- Fujimi Joint Venture."
 
COMPETITION
 
     The Company competes in several distinct markets. These markets include the
semiconductor device equipment market (specifically for CMP), the thin film
memory disk media equipment market, the semiconductor wafer equipment market,
the general industrial applications market, and the related parts and
expendables market. In all markets, the Company competes on the basis of
technology, overall cost of ownership, product quality, price, availability,
size of installed base, breadth of product line and customer service and
support.
 
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     The Company faces substantial competition from both established competitors
and from potential new entrants, some of which have substantially greater
financial, engineering, manufacturing and marketing resources than the Company.
In the semiconductor device equipment market, the Company faces significant
competition from current competitors including Applied Materials, Inc., Ebara
Corporation and Integrated Process Equipment Corp., and any others that may
enter this market in the future. In addition, certain of the Company's
competitors have longer-standing relationships than the Company with particular
customers, including device manufacturers. These longer-standing relationships
may make it more difficult for the Company to sell its CMP system to such
semiconductor device manufacturers. Consolidation among CMP equipment suppliers
or the acquisition of CMP equipment suppliers by large, established suppliers of
non-CMP capital equipment to semiconductor device manufacturers or others could
materially adversely affect the Company's ability to compete and would have a
material adverse effect on the Company's results of operations. In the thin film
memory disk and semiconductor wafer equipment markets, the Company competes with
relatively few but significant competitors. Competition in the general
industrial products markets is fragmented; no one competitor currently holds a
dominant position.
 
     The Company faces significant competitive pressure in the sale of slurries,
particularly with regard to pricing. In the thin film memory disk slurry market,
the Company competes primarily with Praxair, a large chemical company that
manufactures and sells its own products. In addition, the loss of the Company's
distribution rights to slurry and other products supplied by Fujimi Incorporated
would have a material adverse effect on the Company.
 
EMPLOYEES
 
     At May 31, 1998, the Company had 614 full time employees in the U.S. and
Europe, including 92 in manufacturing, 45 in direct sales, sales administration
and marketing, 197 in field service, 49 in engineering, 113 in research and
development and 118 in general administration. In addition, the Company had 8
temporary contract employees engaged principally in its assembly operations at
its Chandler, Arizona and Des Plaines, Illinois facilities. From time to time
the Company will use temporary employees to respond more rapidly to fluctuations
in assembly and product demand and to better control the labor component of its
manufacturing costs. None of the Company's employees is represented by a labor
union and the Company has never experienced a work stoppage or strike. The
Company considers its employee relations to be good.
 
INTELLECTUAL PROPERTY
 
     The Company currently holds 29 United States patents and 28 foreign patents
in Japan and several Asian and European countries and has 145 United States and
foreign patent applications pending. In addition, the Company believes that such
factors as continued innovation, technical expertise and know-how of its
personnel and other factors are also important. The Company owns eight U.S.
trademark registrations. The Company also owns numerous foreign trademarks.
 
     There can be no assurance that the Company's pending patent applications
will be allowed or that the issued or pending patents will not be challenged or
circumvented by competitors. There can be no assurance that any of these rights
held by the Company will not be challenged, invalidated or circumvented, or that
such rights will provide competitive advantages to the Company.
 
     There are no pending lawsuits against the Company regarding infringement of
any existing patents or other intellectual property rights or any unresolved
claims by third parties that the Company is infringing intellectual property
rights of such third parties. There can be no assurance that infringement claims
will not be asserted by third parties in the future. There also can be no
assurance in the event of such claims of infringement that the Company will be
able to obtain licenses on reasonable terms, if at all. The Company's
involvement in any patent dispute or other intellectual property dispute or
action could have a material adverse effect on the Company's business. Adverse
determinations in any litigation relating to intellectual property could
possibly subject the Company to significant liabilities to third parties,
require the Company to seek licenses from third parties and prevent the Company
from manufacturing and selling one or more of its products. Any of these events
could have a material adverse effect on the Company.
 
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     SPEEDFAM, FAM, SPITFIRE, and the SPEEDFAM logo are registered trademarks of
the Company.
 
EXECUTIVE OFFICERS OF THE COMPANY
 
<TABLE>
<CAPTION>
                                                       HELD PRESENT      OTHER POSITIONS HELD
NAME AND POSITION                               AGE    OFFICE SINCE     DURING PAST FIVE YEARS
-----------------                               ---    ------------    -------------------------
<S>                                             <C>    <C>             <C>
James N. Farley...............................  69     1993            Chief Executive Officer
  Chairman of the Board                                                President
 
Makoto Kouzuma................................  58     1997            Chief Operating Officer
  President and Chief Executive Officer                                Executive Vice President
 
Roger K. Marach...............................  53     1988
  Treasurer, Chief Financial Officer
  and Assistant Secretary
 
Christopher E. Augur*.........................  38     1993            Executive Vice President
  President of SpeedFam Corporation                                    of   SpeedFam Corporation
 
Robert R. Smith...............................  55     1974
  Managing Director of SpeedFam
  Limited
</TABLE>
 
---------------
* Mr. Augur resigned from the Company effective June 12, 1998.
 
                                       10
<PAGE>   11
 
                           JOINT VENTURE ARRANGEMENTS
 
FAR EAST JOINT VENTURE
 
     SpeedFam Co., Ltd. (together with its subsidiaries and joint ventures, the
"Far East Joint Venture") is headquartered in Kanagawa Prefecture, Japan.
Generally, the Far East Joint Venture designs, produces and markets in the Far
East equipment similar to that produced by the Company in the U.S. The Far East
Joint Venture conducts operations primarily in Japan but has subsidiaries and
branches located in China, Hong Kong, India, Korea, Singapore, and Taiwan and
owns a majority interest in a Japanese subcontract manufacturing organization,
Saku Seiki Co., Ltd. The Far East Joint Venture reorganized its Asian operations
and closed the Thailand and Malaysia subsidiaries in July of 1998. The Far East
Joint Venture operations in China, Hong Kong, Singapore, and Korea are primarily
marketing, sales and service functions. The subsidiaries in Taiwan and India
also include manufacturing facilities where certain of the equipment sold by the
subsidiaries is produced. Through a joint venture with Met-Coil Systems
Corporation (a U.S. company), the Far East Joint Venture manufactures and
markets in the Far East sheet metal forming equipment developed by Met-Coil
Systems Corporation. The joint venture with Met-Coil Systems Corporation will be
closed in fiscal 1999.
 
     Background.  The Company believed that a presence in the Japanese market
would enhance its competitive position in the U.S. as well as provide additional
sources of income and access to technology. For numerous business and cultural
reasons, the Company decided it could most effectively penetrate the Japanese
market with the aid of a Japanese partner. In 1970 the Company entered into a
joint venture with a Japanese company, Obara Corporation ("Obara"), pursuant to
which the Far East Joint Venture was formed. The Company and Obara each own a
50% interest in the Far East Joint Venture. Obara, a publicly-traded company,
principally supplies welding guns and tips and related products to the
automotive industry; its business is unrelated to that of the Company and the
Far East Joint Venture.
 
     Terms of the Joint Venture Agreement.  Pursuant to the terms of an
agreement between the Company and Obara dated November 14, 1970 (the "Joint
Venture Agreement"), the Far East Joint Venture will continue as long as
SpeedFam Co., Ltd. is in corporate existence and both the Company and Obara are
shareholders. Both parties to the Joint Venture Agreement have agreed to refrain
from competing with the joint venture in Japan. The agreement may, however, be
terminated upon 90-days notification by either party in the event of a
substantial breach by the other party if such breach is not cured within the
90-day period. In the event that either the Company or Obara desires to sell its
interest in the Far East Joint Venture, it must first offer its interest to the
other party, which then has 60 days to purchase the interest at a price to be
mutually agreed upon. If the interest is not purchased within the 60-day period,
the party desiring to sell its interest may sell it to a third party free of the
right of first offer provisions, provided that the price is not less than the
price initially offered by the other party.
 
     Pursuant to the terms of a License and Technical Assistance Agreement
between the Company and SpeedFam Co., Ltd. dated November 14, 1970 (the
"Technology Agreement"), the Company licensed to the Far East Joint Venture
certain trademarks and technology, and granted to the Far East Joint Venture the
exclusive right to manufacture and sell in Japan, Korea, Taiwan, Hong Kong,
China, India, the Philippines, Thailand, Vietnam, Malaysia, Singapore and
Indonesia, and such other countries as the parties may agree to from time to
time, products similar to those manufactured and distributed by the Company. In
exchange for such rights, the Far East Joint Venture agreed to pay to the
Company a royalty of 4% of the total net sales of products sold by the Far East
Joint Venture that incorporate the technology. The Company also agreed to
provide technical assistance and to communicate to the Far East Joint Venture
all developments and improvements related to the technology. In addition, the
Far East Joint Venture agreed to communicate to the Company all developments and
improvements known to the Far East Joint Venture relating to the technology, and
the Company agreed to pay to the Far East Joint Venture a 2% royalty fee on
machines sold by the Company that utilize certain of that technology. The
Technology Agreement continued for an initial term of ten years and was
renewable for subsequent ten year periods. By oral agreement in 1980, the
Technology Agreement was extended and amended to reduce the percentage of
royalties to be paid by the Far East Joint
 
                                       11
<PAGE>   12
 
Venture. Notwithstanding the requirements of the Technology Agreement, although
the Far East Joint Venture had transferred technology to the Company, the
Company and the Far East Joint Venture agreed that no royalties would be paid by
the Company. By oral agreement in 1990, the Technology Agreement was extended
for a new ten-year period. By oral agreement in 1991, the Technology Agreement
was amended to eliminate the payment of royalties by either party. On July 24,
1995, the foregoing oral agreements were confirmed in writing. Unless extended,
the Technology Agreement will expire in November 2000.
 
     Since the inception of the Far East Joint Venture, the Company and the Far
East Joint Venture have cooperated on various research and development projects
and each entity has communicated significant technology to the other. It is not
anticipated that either the Company or the Far East Joint Venture will pay
royalties to the other in connection with the transfer of technology in the
foreseeable future, including with respect to the Company's CMP technology.
 
     Management.  SpeedFam Co., Ltd. currently has seven directors serving on
its Board of Directors, including Messrs. Farley and Kouzuma, the Chairman and
Chief Executive Officer of the Company, respectively, as well as Hiroshi Obara,
Suminori Suzuki, Ryosuke Tojo, Hatsuyuki Arai, and Akitoshi Yoshida. Mr. Kouzuma
is the Executive Vice President and General Manager of SpeedFam Co., Ltd. and is
responsible for day to day operations and acts as the primary liaison between
the Company and Obara. Mr. Obara is the President of the Far East Joint Venture.
Mr. Suzuki, an employee of Obara, is the senior finance officer of the Far East
Joint Venture. Mr. Tojo is Managing Director of SpeedFam Co., Ltd. and assists
in the overall management of operations. Mr. Arai is the director of CMP
technology and reports to Mr. Tojo. Mr. Yoshida is Chief of the Makuhari Techno
Garden Laboratory and reports to Mr. Kouzuma.
 
     The Joint Venture Agreement provides limited direction with respect to the
relationship between the joint venture partners and the operation and management
of the Far East Joint Venture. To date, decisions with respect to the strategic
direction of the Far East Joint Venture have been made by the Company and Obara
from time to time on the basis of informal discussions and the relationships
forged over time by the individuals. Business transactions between the Company
and the Far East Joint Venture, including those relating to the absence of
payment of royalties on transfers of certain technology, may not be consistent
with business decisions and results that would exist between two independent
entities dealing at arms-length.
 
     Financial Information.  During the Company's 1998, 1997 and 1996 fiscal
years, the Company's share of the net earnings of the Far East Joint Venture was
$2.8 million, $5.5 million and $4.8 million, respectively, representing 21.6%,
27.3% and 40.3%, respectively, of the Company's net earnings. In fiscal 1998,
the Far East Joint Venture paid $875,000 in dividends to the Company. The Far
East Joint Venture has not paid significant dividends in the past and is
expected to retain substantially all of its earnings in the foreseeable future
to support the growth of its business. As a result, the Company's share of the
net earnings of the Far East Joint Venture has not in the past resulted and is
not expected in the future to result in a like effect on the cash flows of the
Company. In fiscal 1998, the equity in net earnings of affiliates decreased from
the prior year primarily as a result of a decrease in net earnings of the Far
East Joint Venture. Revenue of the Far East Joint Venture grew in fiscal 1998
from the same period a year ago. However, the decrease in net earnings was
attributable to strong competitive pricing pressures in the thin film memory
disk market, combined with high production and customer support costs. In
addition, the net earnings of the Far East Joint Venture in fiscal 1998 have
also decreased from the prior year due to the severe economic problems facing
several of the Pacific Rim countries, including a decline in the value of the
currencies of these countries. The Company believes that earnings in the Far
East Joint Venture may be adversely affected in the next fiscal year by a
slowdown in demand for equipment sold into the thin film memory disk and silicon
wafer markets, as well as the current financial difficulties facing several
Asian economies. During fiscal 1998, 1997 and 1996, 4.9%, 7.2% and 5.2%
respectively, of the Company's total revenue was attributable to commissions
earned on products produced by the Far East Joint Venture and which were sold by
the Company. At May 31, 1998, the Company's equity interest in the Far East
Joint Venture was $20.5 million, representing 6.2% of the Company's total assets
and 7.1% of stockholders' equity. Set forth below is certain selected financial
information with respect to the Far East Joint Venture which has been derived
from consolidated financial statements which have been audited by
 
                                       12
<PAGE>   13
 
KPMG Peat Marwick LLP. Such information should be read in conjunction with the
consolidated financial statements and notes thereto of the Far East Joint
Venture appearing elsewhere herein.
 
<TABLE>
<CAPTION>
                                                                   YEAR ENDED APRIL 30,
                                                             --------------------------------
                                                               1998        1997        1996
                                                             --------    --------    --------
                                                                      (IN THOUSANDS)
<S>                                                          <C>         <C>         <C>
Consolidated Statements of Earnings Data:
  Net sales................................................  $221,738    $220,281    $161,169
  Gross profit.............................................    56,586      66,773      54,257
  Operating profit.........................................    10,964      20,958      19,959
  Net earnings(1)..........................................     5,863      11,013       9,637
Consolidated Balance Sheet Data (at period end):
  Working capital..........................................  $ 21,614    $ 19,637    $ 23,526
  Total assets.............................................   173,282     153,700     126,551
  Long-term debt, less current portion.....................    18,945      10,786       9,106
  Stockholders' equity.....................................    41,086      40,726      37,091
</TABLE>
 
---------------
(1) Approximately one-half of such amount is recognized by the Company on the
    equity method as "equity in net earnings of affiliates."
 
     Products and Customers.  Generally, the Far East Joint Venture designs,
produces and markets in the Far East equipment similar to that produced by the
Company in the U.S. The Far East Joint Venture's product mix is significantly
different than the Company's primarily because the Far East Joint Venture sells
substantially fewer CMP planarization systems to semiconductor device
manufacturers and because of differences in the composition of the U.S. and Far
East markets. The Far East Joint Venture also designs, produces and markets edge
and flat polishing machines for the semiconductor wafer market and pre-
deposition cleaning machines for the thin film memory disk and flat panel
display markets. The Company distributes certain of these machines in the U.S.
and Europe. The Far East Joint Venture also markets parts, expendables and
slurries (primarily to thin film memory disk and silicon wafer manufacturers).
 
     The Far East Joint Venture has developed and is currently manufacturing and
marketing a two head CMP system. This system is marketed primarily as a tool for
low volume production or research and development. The Company's Auriga and
Auriga-C five head systems and other CMP products are marketed and sold through
the Far East Joint Venture. The Far East Joint Venture receives a commission
from the Company for such sales in the Far East.
 
     The Far East Joint Venture's products are sold to semiconductor wafer
(primarily silicon), thin film memory disk and general industrial (primarily
quartz, ceramic and LCD glass) manufacturers. Major end user customers of the
Far East Joint Venture have included: Nippon Light Metal Co., Ltd. (thin film
memory disk manufacturer), MA Disk (thin film memory disk manufacturer), Kaifa
Technology (thin film memory disk manufacturer), Toyo Kohan Co., Ltd. (thin film
memory disk manufacturer), and Kobe Precision, Inc. (thin film memory disk
manufacturer). During the Far East Joint Venture's fiscal years 1998, 1997 and
1996, sales to certain customers through Fujimi Incorporated, acting as a
distributor, accounted for approximately 24%, 15% and 12% of net sales,
respectively.
 
     Competition.  The Far East Joint Venture competes in several distinct
markets including the semiconductor substrate equipment market, the thin film
memory disk equipment market, the general industrial equipment applications
market (primarily quartz, ceramic and LCD glass) and the slurries market. The
Far East Joint Venture competes on the basis of technology, overall cost of
ownership, product quality, price, availability, size of installed base, breadth
of product line and customer service and support. The Far East Joint Venture
faces intense competition from established competitors, some of which have
substantially greater financial, engineering, manufacturing and marketing
resources. In the equipment markets served, the Far East Joint Venture generally
competes with a relatively small number of competitors which, together with the
Far East Joint Venture, provide a substantial majority of the products sold into
those markets. In the
 
                                       13
<PAGE>   14
 
slurries market, Fujimi Incorporated is the provider of substantially all of the
slurries sold by the Far East Joint Venture. Fujimi Incorporated also sells
directly to end users and is a dominant supplier and distributor of slurries in
the Far East region.
 
     Sales, Marketing and Service.  The Far East Joint Venture markets and sells
its products through a combination of Japanese trading companies and direct
sales personnel. As is customary in Japan, the Far East Joint Venture sells a
substantial portion of the products sold in Japan through trading companies,
although the Far East Joint Venture sales personnel have primary responsibility
for most aspects of the sale. The Far East Joint Venture maintains a field
service organization consisting of 83 persons based in the major locations where
the Far East Joint Venture maintains a presence, such as Japan, India, Korea,
Singapore, and Taiwan.
 
     Research, Development and Manufacturing.  The Far East Joint Venture
maintains a research and development staff of 77 persons. Research and
development efforts of the Far East Joint Venture are focused on enhancing
existing products as well as developing new products and generally cover a
broader range of products and technologies than the Company's research and
development efforts. The Company and the Far East Joint Venture have in the past
collaborated on various projects and are expected to do so in the future.
 
     The Far East Joint Venture or manufacturing subcontractors retained by the
Far East Joint Venture typically manufacture equipment and systems from
components and fabricated parts manufactured and supplied by others. Certain of
the items manufactured by others are made to the Company's specifications. A
portion of the products sold by the Far East Joint Venture are manufactured by
the Far East Joint Venture's majority owned subsidiary, Saku Seiki Co., Ltd.,
and a substantial portion are manufactured by unaffiliated third party
subcontractors for the Far East Joint Venture.
 
     Employees.  At April 30, 1998, the Far East Joint Venture had 526 full-time
employees, including 428 in Japan, 22 in Korea, 40 in Taiwan, 17 in India, 15 in
Singapore, 2 in Shanghai, and 2 in Hong Kong. Of these employees, 88 are engaged
in manufacturing, 69 in marketing and sales, 83 in field service, 87 in
engineering, 77 in research and development, 59 in management and 63 in clerical
and general administration.
 
     Certain Relationships.  The Company acts as distributor in North America
and Europe of certain machines produced by the Far East Joint Venture. During
fiscal 1998, 1997 and 1996, commissions paid to the Company relating to such
distribution amounted to approximately $9.0 million, $12.4 million and $6.3
million, respectively. Further, the Company purchases certain components used in
its machines from the Far East Joint Venture. During fiscal 1998, 1997 and 1996,
purchases of components from the Far East Joint Venture totaled approximately
$6.3 million, $6.1 million and $7.6 million, respectively.
 
     As of May 31, 1998, Mr. Kouzuma received certain amounts from the Far East
Joint Venture consisting of directors' fees, bonuses and salary. Pursuant to a
proposed agreement between the Company and the Far East Joint Venture, the
Company will compensate Mr. Kouzuma directly for services rendered to the Far
East Joint Venture (consisting of directors' fees, bonuses and salary). The Far
East Joint Venture will pay the Company directly a set amount annually for the
use of Mr. Kouzuma's services. Once the agreement is executed, Mr. Kouzuma will
receive directly from the Far East Joint Venture only payments required under
employee benefit plans, and certain dividends as discussed below.
 
     Both Messrs. Farley and Kouzuma receive dividends on their individual
holdings of stock in certain of SpeedFam Co., Ltd.'s subsidiaries. Both Messrs.
Farley and Kouzuma serve as directors of SpeedFam Co., Ltd. In addition, both
serve as directors of SpeedFam Clean Systems Co., Ltd., a majority owned
subsidiary of SpeedFam Co., Ltd. Mr. Kouzuma also serves as President of
SpeedFam Clean Systems Co., Ltd. In addition, each of Messrs. Farley and Kouzuma
own 5% of the outstanding capital stock of SpeedFam Clean Systems Co., Ltd.
Messrs. Farley and Kouzuma also serve as directors of Met-Coil Ltd., SpeedFam
Co., Ltd.'s 50%-owned joint venture. Mr. Kouzuma owns 10.62% of the outstanding
capital stock of Saku Seiki Co., Ltd., a majority owned subsidiary of SpeedFam
Co., Ltd., and serves as a director of Saku Seiki Co., Ltd. Messrs. Farley and
Kouzuma also serve as directors of several subsidiaries of SpeedFam Co., Ltd.,
namely SpeedFam Korea Ltd., SpeedFam Incorporated in Taiwan, SpeedFam India
(Pvt.) Ltd. and SpeedFam (S.E.A.) Pte. Ltd. in Singapore.
 
                                       14
<PAGE>   15
 
FUJIMI JOINT VENTURE
 
     Pursuant to a joint venture agreement dated September 7, 1984, the Company
and Fujimi Incorporated formed Fujimi Corporation (the "Fujimi Joint Venture"),
an Illinois corporation. Each of Fujimi Incorporated and the Company owns 50% of
the Fujimi Joint Venture's common stock. Fujimi Incorporated, a publicly traded
company in Japan, is a manufacturer of slurry, abrasives and compounds in Japan.
The initial term of the joint venture agreement was for a period of five years,
but the agreement continues in effect until such time as either party terminates
upon written notice delivered to the other party upon one-year notice. The
agreement may also be terminated upon 60-days notification by either party in
the event of a breach by the other party if such breach is not cured within 60
days.
 
     The Fujimi Joint Venture was organized to sell Fujimi Incorporated products
in North and South America. The Fujimi Joint Venture distributes abrasives,
polishing pads, diamond wheels, diamond slurries and other products to the
semiconductor wafer, thin film memory disk and general industrial markets.
Notwithstanding the written terms of the joint venture agreement, the Company,
through SpeedFam U.S., has distributed a variety of products, primarily slurry,
to manufacturers of thin film memory disks. The Company has the exclusive right
to distribute Fujimi Incorporated memory disk polishing slurry in North America
until October 1, 1999. Revenue from sales of products by the Fujimi Joint
Venture was $36.8 million in fiscal 1998, $36.6 million in fiscal 1997 and $19.7
million in fiscal 1996. For a description of other business relationships
between the Company and Fujimi Incorporated, see "Business -- Manufacturing and
Suppliers." The Fujimi Joint Venture imports a portion of the products it sells
and purchases such products in non-U.S. dollar denominated transactions. This
business is subject to foreign exchange rate fluctuations which can
significantly impact operating profit margins.
 
     The Fujimi Joint Venture currently has six directors serving on its Board
of Directors, including Mr. Farley, Chairman of the Company, Mr. Kouzuma, Chief
Executive Officer of the Company, and Mr. Marach, Chief Financial Officer of the
Company. The other three directors, Messrs. Isamu Koshiyama, Tadashi Nagotoshi
and Stuart Sawai, are representatives of Fujimi Incorporated. Day to day
management of the Fujimi Joint Venture is under the control of its president,
Mr. Donald R. Hixson. The Fujimi Joint Venture employs five full-time sales
personnel.
 
ITEM 2.  PROPERTIES.
 
     The Company currently owns or leases buildings containing a total of
approximately 262,000 square feet of space in the U.S. and Europe, including
approximately 135,000 square feet of assembly/warehouse area and approximately
127,000 square feet of sales, marketing, research and development, and
administrative office space.
 
     The Company's U.S. Operations (SpeedFam International, Inc., and the
SpeedFam U.S. subsidiary) account for approximately 247,000 square feet of the
total of which approximately 176,000 square feet is owned. The balance of
approximately 71,000 square feet is leased.
 
     The Company maintains locations in the United States in Chandler, Arizona,
Des Plaines, Illinois, Elk Grove Village, Illinois, Austin, Texas, Portland,
Oregon, and Fremont, California.
 
     SpeedFam U.K. is located in Hinckley, England and maintains approximately
9,000 square feet of owned space. SpeedFam Germany has approximately 2,000
square feet of leased office space in Ingelfingen, Germany. Another 4,000 square
feet is leased at several customer support sites in England and Germany.
 
     Currently under construction, next to the Company's corporate headquarters
in Chandler, Arizona, is a new 109,000 square foot Technology Center devoted
solely to research and development. The new facility will include Class 1 to
Class 10,000 clean-room space to support process research and development work
in chemical mechanical planarization and cleaning of multi-level semiconductor
devices, memory disk polishing, and silicon wafer lapping and polishing.
 
ITEM 3.  LEGAL PROCEEDINGS.
 
     The Company is not presently involved in any material legal proceedings.
 
                                       15
<PAGE>   16
 
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
 
     None.
 
                                    PART II
 
ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
 
<TABLE>
<CAPTION>
                                                            NUMBER OF
                                                         STOCKHOLDERS OF
                                                          RECORD AS OF
TITLE OF CLASS                                            MAY 31, 1998
--------------                                           ---------------
<S>                                                      <C>
Common Stock, no par value...........................          114
</TABLE>
 
     The Company's Common Stock is traded on the Nasdaq National Market under
the symbol "SFAM." Public trading of the Common Stock commenced on October 10,
1995. Prior to that time, there was no public market for the Company's Common
Stock. The following table sets forth the high and low closing sale prices for
the Common Stock as reported by Nasdaq for the periods indicated:
 
<TABLE>
<CAPTION>
                                                          HIGH      LOW
                                                          ----      ---
<S>                                                      <C>       <C>
Fiscal 1997
  First Quarter........................................  $20 1/8   $11 1/8
  Second Quarter.......................................   23 5/16   10 7/8
  Third Quarter........................................   39 3/4    20 7/8
  Fourth Quarter.......................................   39 1/2    24 1/4
Fiscal 1998
  First Quarter........................................  $54 7/8   $31 1/2
  Second Quarter.......................................   60 3/8    25 5/8
  Third Quarter........................................   30 1/2    19 7/8
  Fourth Quarter.......................................   30 7/8    19 1/2
Fiscal 1999
  First Quarter (through August 21, 1998)..............  $20 3/4   $16 1/16
</TABLE>
 
     The Company has never declared or paid cash dividends on its Common Stock.
The Company currently intends to retain any future earnings to finance the
growth and development of its business and does not intend to pay any cash
dividends on its Common Stock in the foreseeable future. Payment of dividends in
the future, if any, will be made at the discretion of the Board of Directors of
the Company. Such decisions will depend on a number of factors, including the
future earnings, capital requirements, financial condition and future prospects
of the Company and such other factors as the Board of Directors may deem
relevant.
 
ITEM 6.  SELECTED FINANCIAL DATA.
 
                      SELECTED CONSOLIDATED FINANCIAL DATA
 
     The consolidated statement of earnings data for the years ended May 31,
1998, 1997 and 1996 and the consolidated balance sheet data as of May 31, 1998
and 1997 are derived from the Company's consolidated financial statements and
notes thereto which have been audited by KPMG Peat Marwick LLP, independent
public accountants and are included elsewhere herein. The consolidated statement
of earnings data for the years ended May 31, 1995 and 1994 and the consolidated
balance sheet data as of May 31, 1996, 1995 and 1994 are derived from the
Company's consolidated financial statements which have been audited by KPMG Peat
Marwick LLP but are not included herein. The selected consolidated financial
data presented below should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and with the
Company's consolidated financial statements, appearing elsewhere herein.
 
                                       16
<PAGE>   17
 
<TABLE>
<CAPTION>
                                                          YEAR ENDED MAY 31,
                                        ------------------------------------------------------
                                          1998        1997        1996       1995       1994
                                        --------    --------    --------    -------    -------
                                                (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                     <C>         <C>         <C>         <C>        <C>
REVENUE:
Net sales.............................  $176,247    $160,994    $113,880    $57,021    $49,247
Commissions from affiliate............     9,009      12,430       6,290      2,757      2,134
                                        --------    --------    --------    -------    -------
Total revenue.........................   185,256     173,424     120,170     59,778     51,381
Cost of sales.........................   109,751     103,501      78,661     45,494     38,945
                                        --------    --------    --------    -------    -------
Gross margin..........................    75,505      69,923      41,509     14,284     12,436
OPERATING EXPENSES:
Research, development and
  engineering.........................    33,681      19,766      11,496      2,740      2,267
Selling, general and administrative...    35,880      28,671      18,922      9,948      8,988
                                        --------    --------    --------    -------    -------
Operating profit......................     5,944      21,486      11,091      1,596      1,181
Other income (expense)................     5,957        (298)       (208)      (953)       277
                                        --------    --------    --------    -------    -------
Earnings from consolidated companies
  before income taxes.................    11,901      21,188      10,883        643      1,458
Income tax expense (benefit)..........     3,456       8,037       4,266        186       (160)(2)
                                        --------    --------    --------    -------    -------
Earnings from consolidated companies
  before cumulative effect of change
  in accounting principle.............     8,445      13,151       6,617        457      1,618
Equity in net earnings of
  affiliates(1).......................     4,418       7,068       5,204      1,187        655
Cumulative effect of change in
  accounting principle for income
  taxes...............................        --          --          --         --         78
                                        --------    --------    --------    -------    -------
Net earnings..........................  $ 12,863    $ 20,219    $ 11,821    $ 1,644    $ 2,351
                                        ========    ========    ========    =======    =======
Net earnings per share:
  Basic...............................  $   0.86    $   1.78    $   1.27    $  0.22    $  0.32
                                        ========    ========    ========    =======    =======
  Diluted.............................  $   0.83    $   1.67    $   1.16    $  0.20    $  0.31
                                        ========    ========    ========    =======    =======
Weighted average number of shares:
  Basic...............................    14,971      11,349       9,344      7,468      7,475
                                        ========    ========    ========    =======    =======
  Diluted.............................    15,591      12,127      10,159      8,146      7,619
                                        ========    ========    ========    =======    =======
CONSOLIDATED BALANCE SHEET DATA:
Working capital.......................  $210,250    $106,822    $ 31,193    $11,072    $ 9,980
Total assets..........................   329,765     206,500     107,984     60,029     45,709
Long-term obligations, less current
  maturities..........................        --         272       2,593     10,362      9,716
Stockholders' equity..................   288,852     156,533      60,039     23,037     18,576
</TABLE>
 
---------------
(1) Includes $2,776, $5,513, $4,759, $1,100 and $450 for the 1998 through 1994
    fiscal years, respectively, attributable to the Company's share of net
    earnings from the Far East Joint Venture, accounted for on the equity
    method. See "Business -- Joint Venture Arrangements," and the consolidated
    financial statements of the Far East Joint Venture included elsewhere
    herein. The remainder represents the Company's share of net earnings from
    the Fujimi Joint Venture.
 
(2) Reflects an income tax benefit of $740 related to the bankruptcy of a
    subsidiary operating in Switzerland.
 
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
 
OVERVIEW
 
     The Company designs, develops, manufactures, markets and services chemical
mechanical planarization, or "CMP," systems used in the fabrication of
semiconductor devices as well as other high-throughput precision surface
processing equipment used in the fabrication of thin film memory disk media,
semiconductor wafers and general industrial components. In addition, the Company
markets and distributes parts and expendables and slurries. The Company's total
revenue consists of net sales in two business segments: (i) equipment, parts and
expendables, and (ii) slurries, as well as commissions earned on the
distribution in the U.S. and Europe of products manufactured by the Far East
Joint Venture. Sales of the Company's products are recorded upon shipment or
when the product is accepted by the customer, provided that no
 
                                       17
<PAGE>   18
 
significant obligations remain outstanding and collection of the related
receivable is deemed probable. The Company accrues estimated warranty and
installation expenses for each equipment and system order at the time the order
is shipped.
 
     Equipment, parts and expendables consist of capital equipment manufactured
by the Company, spare parts for that equipment and expendable products, such as
bearings, grinding stones, lapping plates, workpiece carriers, seals, retaining
rings, workholders and polishing pads. During fiscal years 1998, 1997, and 1996,
83.7%, 83.6%, and 77.3% respectively, of the Company's net sales was
attributable to the sale of capital equipment, parts and expendables.
Historically, the gross margin for products in this segment has been
significantly higher than that for slurries. The Company began development of
its original CMP product, the CMP-V, in 1990. The Company initiated volume
shipments of the CMP-V in 1994. Shipments of the Auriga began in fiscal 1997. In
the second quarter of fiscal 1998, the Company began shipments of its latest CMP
enhancement, the Auriga-C. Through May 31, 1998, the Company had sold 10
Auriga-C systems. The Company's CMP systems accounted for 57.2%, 50.2% and
34.7%, of net sales for fiscal 1998, 1997, and 1996 respectively. The Company's
CMP systems generally have higher gross margins than those of the Company's
other capital equipment products.
 
     Slurries consist of polishing slurry and slurry components (including
vehicles and abrasives) used in surface processing. During fiscal years 1998,
1997, and 1996, 16.3%, 16.4% and 22.7%, respectively, of the Company's net sales
was attributable to the sale of slurries. Substantially all of the slurries sold
by the Company are manufactured by Fujimi Incorporated. Historically, the gross
margin for slurries has been significantly lower than that for equipment, parts
and expendables. In recent years, the Company has experienced severe competitive
pressure in the sale of slurries and has been required to reduce prices. In
addition, the Company has experienced increased slurry costs.
 
     Commissions from affiliate ("commissions") consist primarily of revenue
derived from the distribution by the Company in the U.S. and Europe of products
manufactured by the Far East Joint Venture for which the Company acts as sales
agent. Certain capital equipment marketed and distributed by the Company is
produced solely by the Far East Joint Venture. The Company distributes such
products throughout the U.S. and Europe and receives commissions thereon. Such
amount reflects the difference between the imported equipment's cost to the
Company and sales price to the customer. For fiscal 1998, 1997, and 1996,
commissions accounted for 4.9%, 7.2%, 5.2%, respectively, of total revenue.
Commissions are subject to foreign exchange rate fluctuations which can
significantly impact operating profit margins.
 
     In fiscal 1998, 1997, and 1996, 31.7%, 31.2% and 21.7%, respectively, of
the Company's total revenue was attributable to sales outside of the United
States. In particular, in fiscal 1998, 12.5% of the Company's total revenue was
attributable to sales made to European markets and 19.2% was attributable to
sales to markets in the Far East.
 
     The Company generally enters into foreign exchange contracts to hedge
certain firm commitments denominated in foreign currencies, principally in
Japanese yen. The terms of the contracts are rarely more than one year. Currency
exchange rate variations have had an immaterial effect on the Company's results
of operations for the periods presented. The results of operations of the
Company's subsidiaries and its equity in the net earnings of the Far East Joint
Venture are translated for financial statement purposes based upon average
exchange rates during the period covered. As a result, fluctuations in exchange
rates may have an adverse effect on the Company's results of operations. Net
assets of the Company's foreign subsidiaries and 50% of the net assets of the
Far East Joint Venture were approximately $26.5 million at April 30, 1998 (the
end of fiscal 1998 of such entities).
 
     The Company owns a 50% interest in both the Far East Joint Venture and the
Fujimi Joint Venture. The Company's equity interest in each joint venture is
accounted for on the equity method. As a result, the Company's share of the net
earnings of the Far East Joint Venture and the Fujimi Joint Venture appear in
the "Equity in net earnings of affiliates" caption on the Company's consolidated
statements of earnings. The Far East Joint Venture and the Fujimi Joint Venture
have paid dividends in the past and may continue to do so in the foreseeable
future, but are expected to reinvest substantially all their earnings back into
their respective businesses. The Company's share of the net earnings of the Far
East Joint Venture has not in the past resulted
                                       18
<PAGE>   19
 
and is not expected in the future to result in a like effect on the cash flows
of the Company. At May 31, 1998, the Company's equity interest in the Far East
Joint Venture was $20.5 million, representing 6.2% of the Company's total assets
and 7.1% of stockholders' equity. The net earnings of the Company in the past
have been substantially influenced by the results of operations of the Far East
Joint Venture and can be expected to continue to be so influenced in the future.
See "Business -- Joint Venture Arrangements" and the consolidated financial
statements of SpeedFam Co., Ltd. included elsewhere herein.
 
RESULTS OF OPERATIONS
 
     The following table sets forth certain consolidated statements of earnings
data for the periods indicated as a percentage of total revenue:
 
<TABLE>
<CAPTION>
                                                        YEARS ENDED MAY 31,
                                                      -----------------------
                                                      1998     1997     1996
                                                      -----    -----    -----
<S>                                                   <C>      <C>      <C>
REVENUE:
Net sales...........................................   95.1%    92.8%    94.8%
Commissions from affiliate..........................    4.9      7.2      5.2
                                                      -----    -----    -----
Total revenue.......................................  100.0    100.0    100.0
Cost of sales.......................................   59.2     59.7     65.5
                                                      -----    -----    -----
Gross margin........................................   40.8     40.3     34.5
OPERATING EXPENSES:
Research, development and engineering...............   18.2     11.4      9.6
Selling, general and administrative.................   19.4     16.5     15.7
                                                      -----    -----    -----
Operating profit....................................    3.2     12.4      9.2
Other income (expense)..............................    3.2     (0.2)    (0.2)
                                                      -----    -----    -----
Earnings from consolidated companies before income
  taxes.............................................    6.4     12.2      9.0
Income tax expense..................................    1.9      4.6      3.5
                                                      -----    -----    -----
Earnings from consolidated companies................    4.5      7.6      5.5
Equity in net earnings of affiliates................    2.4      4.1      4.3
                                                      -----    -----    -----
Net earnings........................................    6.9%    11.7%     9.8%
                                                      =====    =====    =====
</TABLE>
 
  Fiscal 1998 Compared with Fiscal 1997
 
     Net Sales.  Net sales for the fiscal year ended May 31, 1998 were $176.2
million, up 9.5% over net sales of $161.0 million in fiscal 1997. Equipment,
parts and expendables accounted for 83.7% of net sales in fiscal 1998 compared
to 83.6% in fiscal 1997. The dollar growth in this segment was attributable to
higher sales of the Company's CMP planarization systems to the semiconductor
industry. In addition, the average selling price of the CMP systems increased
over the prior year due to a shift in product mix to the Auriga and the Auriga-C
from the CMP-V in fiscal 1998. Sales of CMP systems totaled $100.8 million, or
57.2% of net sales, up 24.8% over the $80.8 million of CMP system sales in
fiscal 1997. However, the Company believes that there has been a slowdown in
overall demand for semiconductor manufacturing equipment including CMP systems,
which has slowed sales to the semiconductor device market worldwide. This
slowdown is a result of excess production capacity in both the DRAM and logic
segment and resultant decreasing device prices within the DRAM market segment.
As a result, semiconductor manufacturers are expected to reduce or delay their
investment in manufacturing equipment. In addition, the semiconductor device
market has been affected by the conditions surrounding the economic health of
Asian countries, particularly Korea and Japan. The Company believes that these
market and economic uncertainties will likely have an adverse effect on sales of
CMP systems at least through the next fiscal year.
 
   
     Sales to the thin film memory disk market in fiscal 1998 accounted for
$51.9 million, or 29.4% of net sales, as compared to $59.1 million, or 36.7% of
net sales in fiscal 1997. This decrease was primarily due to a
    
 
                                       19
<PAGE>   20
 
   
decline in sales of equipment to the thin film memory disk market from the prior
year. The technology for the production of thin film memory disks has shifted to
the use of alternative substrates; a majority of those substrates being produced
by Far East manufacturers. Consequently, thin film memory disk manufactures
headquartered in the United States have experienced manufacturing over-capacity
which in turn has reduced capital spending for equipment the Company supplies
from its U.S. operations. The Company expects these manufacturing over-capacity
problems to continue in the U.S. through the next fiscal year. Sales of slurries
increased to $28.8 million in fiscal 1998 from $26.3 million in fiscal 1997. As
a percent of net sales, sales of slurries remained relatively unchanged at 16.3%
in fiscal 1998 compared to 16.4% in fiscal 1997. European net sales increased to
$11.0 million in fiscal 1998 from $9.9 million in fiscal 1997.
    
 
     Commissions from Affiliate.  Commissions from affiliate decreased to $9.0
million in the year ended May 31, 1998, compared to $12.4 million in the year
ended May 31, 1997. The decrease in fiscal 1998, as compared to fiscal 1997, was
due not only to the continued slowdown in the thin film memory disk market, but
also to a global decrease in orders of capital equipment from the silicon wafer
market related to manufacturing over capacity due to slowing demand for wafers
produced by that industry. The Company believes that capital equipment spending
will further decline in the thin film memory disk and silicon wafer industries
in the next fiscal year, in turn lowering commissions from affiliate.
 
   
     Gross Margin.  In fiscal 1998, gross margin was $75.5 million, or 40.8% of
total revenue, compared to $69.9 million, or 40.3% of total revenue, in fiscal
1997. Gross margin increased primarily due to the increased sales of CMP systems
in fiscal 1998. However, the impact of improved gross margins due to higher
sales of CMP systems was mostly offset by declining gross margins on sales to
the thin film memory disk industry, declining slurry margins and lower
commission revenue compared to fiscal 1997. Gross margin was also impacted by an
additional $1.5 million in warranty expense accrued in the fourth quarter of
fiscal 1998. Due to the increasing complexity of the Company's CMP products, and
the importance of maintaining customer good will in the current competitive
environment, management made the decision in the fourth quarter of fiscal year
1998 to accrue for additional equipment warranty to cover the anticipated
customer service costs of its CMP products.
    
 
     Research, Development and Engineering.  In the year ended May 31, 1998,
research, development and engineering expense increased to $33.7 million, or
18.2% of total revenue, compared to $19.8 million, or 11.4% of total revenue, in
fiscal 1997. The increase in both the dollar amount and the percentage of total
revenue is a result of the Company's significant investment in dry-in/dry-out,
end-point detection and 300mm planarization capabilities for its CMP systems;
improvements in CMP systems' reliability and productivity; and various process
technologies for the semiconductor device, thin film memory disk and silicon
wafer markets. In addition, the Company has committed significant technical
support resources to meet the needs of its customers. Even though these
investments negatively impacted operating profits in fiscal 1998, the Company
will continue to invest in research, development, and engineering to maintain
technological competitiveness and meet the process requirements of its
customers.
 
     Selling, General and Administrative.  In fiscal 1998, selling, general and
administrative expense increased to $35.9 million from $28.7 million in fiscal
1997. In fiscal 1998, selling, general and administrative expense increased as a
percent of total revenue to 19.4% from 16.5% in fiscal 1997. This increase in
selling, general and administrative expense reflects continued investments in
the sales and administrative infrastructure, as well as increased commissions
paid to the Far East Joint Venture as a result of increased sales of CMP systems
produced by the Company in the U.S. and exported to Pacific Rim customers
through the Far East Joint Venture. In the fourth quarter of fiscal 1998,
selling, general and administrative expense also included an increase in the
allowance for doubtful accounts receivable due to possible exposures in the Far
East as well as severance compensation related to reductions in the Company's
workforce which were made during the quarter.
 
     Other Income (Expense).  Other income increased to $6.0 million in fiscal
1998 from $298,000 of other expense in fiscal 1997. Other income (expense)
consisted primarily of interest income in fiscal 1998. Interest income increased
substantially in fiscal 1998 as a result of the cash infusions from the
Company's two successful equity offerings in February and October of calendar
year 1997.
 
                                       20
<PAGE>   21
 
     Provision for Income Taxes.  The Company's effective tax rate in fiscal
1998 was 29%, compared to 38% in fiscal 1997. The Company's effective income tax
rate in fiscal 1998 differs from the Federal statutory rate primarily as a
result of state taxes, net of the U.S. federal benefit, more than offset by the
tax benefit from a foreign sales corporation and tax exempt investment
securities.
 
     Equity in Net Earnings of Affiliates.  For the year ended May 31, 1998,
equity in net earnings of affiliates decreased to $4.4 million compared to $7.1
million in the year ended May 31, 1997. Revenue of the Far East Joint Venture
grew in fiscal 1998 from the same period a year ago. However, net earnings of
the Far East Joint Venture were down from the prior year due to competitive
pricing pressures for the automated disk polishing systems, which negatively
impacted gross margins, combined with higher costs of producing and servicing
these systems. The Company believes that the earnings of the Far East Joint
Venture may be adversely affected for at least the next fiscal year by both the
slow down in demand for equipment sold into the thin film memory disk and
silicon wafer markets, as well as the current economic and currency crises
facing several Asian economies. Restructuring costs of approximately $742,000
were incurred by the Far East Joint Venture during fiscal 1998 in connection
with the reorganization of its Asian operations which included the closing of
the Malaysia and Thailand subsidiaries in July of 1998.
 
  Fiscal 1997 Compared with Fiscal 1996
 
   
     Net Sales.  Net sales for the fiscal year ended May 31, 1997 were $161.0
million, up 41.4% over net sales of $113.9 million in fiscal 1996. Equipment,
parts and expendables accounted for 83.6% of net sales in fiscal 1997 compared
to 77.3% in fiscal 1996. The growth in this segment was attributable to higher
sales of the Company's CMP planarization systems to the semiconductor industry.
Sales of CMP systems totaled $80.8 million, or 50.2% of net sales, more than
double the $39.5 million of CMP system sales in fiscal 1996. In addition to the
significant increase in CMP equipment sales to semiconductor manufacturers, net
sales for the fiscal year increased due to a higher level of sales of equipment,
parts and expendables to the thin film memory disk media market. Sales to the
thin film memory disk market in fiscal 1997 accounted for $59.1 million, or
36.7% of net sales, as compared to $49.5 million, or 43.5% of net sales in 1996.
Sales of slurries increased to $26.3 million in fiscal 1997 from $25.8 million
in fiscal 1996. However, as a percent of net sales, sales of slurries decreased
to 16.4% in fiscal 1997 from 22.7% in fiscal 1996. European sales decreased to
$9.9 million in fiscal 1997 from $10.9 million in fiscal 1996.
    
 
     Commissions from Affiliate.  Commissions from affiliate increased to $12.4
million in the year ended May 31, 1997, compared to $6.3 million in the year
ended May 31, 1996. The increase in fiscal 1997, as compared to fiscal 1996, was
due primarily to increased demand in the silicon wafer industry for polishing
systems developed and manufactured by the Far East Joint Venture. In addition,
sales of cleaning and polishing systems, also produced by the Far East Joint
Venture, to customers in the thin film memory disk media market increased
significantly in fiscal 1997 over fiscal 1996. Commissions from affiliate also
improved over the prior year due to improved margins on import machines.
 
     Gross Margin.  In fiscal 1997, gross margin was $69.9 million, or 40.3% of
total revenue, compared to $41.5 million, or 34.5% of total revenue, in fiscal
1996. In addition to higher sales levels, gross margin has increased due to a
continuing increase in sales of higher margin equipment, particularly systems
for the planarization of semiconductor devices. In addition, higher commission
revenue contributed to the increased gross margins in fiscal 1997.
 
     Research, Development and Engineering.  In the year ended May 31, 1997,
research, development and engineering expense increased to $19.8 million, or
11.4% of total revenue, compared to $11.5 million, or 9.6% of total revenue, in
fiscal 1996. The increase in both the dollar amount and as a percent of total
revenue is a result of the continued investment in the development of the CMP
process and products for key markets, particularly for the semiconductor sector,
and the increase in the Company's field support organization throughout the
world. Such expenditures resulted in the development and sale of the Auriga, and
the development of a post-CMP cleaning technology.
 
     Selling, General and Administrative.  In fiscal 1997, selling, general and
administrative expense increased to $28.7 million from $18.9 million in fiscal
1996. In fiscal 1997, selling, general and administrative
                                       21
<PAGE>   22
 
expense increased as a percent of total revenue to 16.5% from 15.7% in fiscal
1996. Higher levels of spending were required to support the sales growth in
fiscal 1997. This increase in selling, general and administrative expense as a
percentage of revenue reflects continued investments in the sales and
administrative infrastructure, as well as increased commissions paid to the Far
East Joint Venture as a result of increased sales of CMP systems produced by the
Company in the U.S. and exported to Pacific Rim customers though its joint
venture affiliate.
 
     Other Income (Expense).  Other expense increased to $298,000 in fiscal 1997
from $208,000 in fiscal 1996. Other income (expense) includes charges associated
with the Company's public common stock offering in the first quarter of fiscal
1997 which was subsequently canceled, interest expense, miscellaneous expenses
and interest income.
 
     Provision for Income Taxes.  The Company's effective tax rate in fiscal
1997 was 38%, compared to 39% in fiscal 1996. The Company's effective income tax
rate in fiscal 1997 differs from the Federal statutory rate primarily as a
result of state taxes, net of the U.S. federal benefit offset by the tax benefit
from a foreign sales corporation and research and development tax credits.
 
     Equity in Net Earnings of Affiliates.  For the year ended May 31, 1997,
equity in net earnings of affiliates increased to $7.1 million compared to $5.2
million in the year ended May 31, 1996 primarily as a result of continued strong
demand for products sold to the thin film memory disk and semiconductor wafer
industries by the Far East Joint Venture. In addition, the Company's share of
the net earnings of the Fujimi Joint Venture was significantly higher than in
fiscal 1996 due to increased sales and improved margins realized during fiscal
1997 on slurry products sold by the Fujimi Joint Venture to the U.S. silicon
wafer market.
 
LIQUIDITY AND CAPITAL RESOURCES
 
   
     As of May 31, 1998, the Company had $141.2 million in cash, cash
equivalents and short-term investments, compared to $76.9 million at May 31,
1997. The Company used $25.5 million of cash in operating activities. Net
earnings adjusted for non-cash depreciation and amortization and equity in the
net earnings of affiliates provided $13.0 in cash. However, investments in
working capital used $39.8 million primarily due to growth in inventories,
accounts receivable and decreases in accrued expenses, customer deposits and
income taxes payable. During fiscal 1998, inventories increased as a result of
customer requests to delay shipments of CMP systems until fiscal 1999. Also,
orders built on speculation for delivery in the fourth quarter of fiscal 1998
were not received due to customer cutbacks in capital spending. The Company
established and obsolescence reserve for inventories in the amount of $1.4 and
$1.1 million at May 31, 1998 and 1997, respectively. Accounts receivable
increased from the prior year due to more of the Company's products being sold
into geographic regions with longer collection periods, especially the Far East.
In addition, average collection times increased as customers extended times to
evaluate new tool introductions and enhancements.
    
 
     In fiscal 1998, $61.1 million of cash was used in investing activities
primarily for net purchases of short-term investments and capital expenditures.
The Company made capital expenditures of $32.1 million primarily to purchase
machinery and equipment, land, computer equipment and software and complete
payments for the construction of the corporate headquarters in Chandler,
Arizona.
 
     The Company currently anticipates capital expenditures of approximately
$37.0 million for fiscal 1999. Of this amount, $21.5 million is expected to be
used to complete construction on a new 109,000 square foot Technology Center
next to the corporate headquarters in Chandler, Arizona.
 
   
     In fiscal 1998, net cash provided by financing activities was $120.2
million. The Company has financed its growth in recent years primarily from the
issuance of common stock. In October of 1997, the Company completed a public
offering of common stock. The Company issued 2,327,000 shares of common stock
and received net proceeds of $116.7 million. In addition, for the year ended May
31, 1998, $3.7 million was provided by the sale of stock to employees through
the Company's Employee Stock Purchase Plan and through the exercise of stock
options. Also available to the Company is a $60.0 million credit facility
negotiated in August of 1997 with its U.S. bank group. The term of the note is
for three years. As of
    
 
                                       22
<PAGE>   23
 
August 14, 1998, no amounts were outstanding on this loan facility. In addition,
the Company has a L950,000 ($1.6 million) unsecured, multi-currency, revolving
line of credit with the London branch of a U.S. bank. As of August 14, 1998, no
amounts were outstanding on this credit facility.
 
     The Company believes that its current cash position and the current bank
lines of credit will be sufficient to meet the Company's cash needs during the
next 12 months.
 
     SFAS No. 130, "Reporting Comprehensive Income" is effective for fiscal
years beginning after December 15, 1997. SFAS No. 130 establishes standards for
the reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements. The Statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. The Company is evaluating the Statement's provisions
to conclude how it will present comprehensive income in its financial
statements, and has not yet determined the amounts to be disclosed. The Company
will adopt SFAS No. 130 effective for the fiscal year ended May 31, 1999.
 
     SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" is effective for financial statements for periods beginning after
December 15, 1997. SFAS No. 131 establishes standards for the way that public
business enterprises report financial and descriptive information about
reportable operating segments in annual financial statements and interim
financial reports issued to stockholders. SFAS No. 131 supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise," but retains the
requirement to report information about major customers. The Company is
evaluating the new Statement's provisions to determine the additional
disclosures required in its financial statements, if any. The Company will adopt
SFAS No. 131 effective for the fiscal year ended May 31, 1999.
 
     SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" is effective for financial years beginning after June 15, 1999. SFAS
No. 133 establishes accounting and reporting standards for derivative
instruments and hedging activities. The Company is evaluating the new
Statement's provisions and has not yet determined its impact. The Company will
adopt SFAS No. 133 effective June 1, 2000.
 
YEAR 2000
 
     The Company is addressing the issues associated with the programming code
in existing computer systems as the millennium (Year 2000) approaches. The Year
2000 problem is pervasive and complex as virtually every computer operation will
be affected in some way. The Company is aware of and is addressing the potential
computing difficulties that may be triggered by the Year 2000.
 
     The Company has commenced a Year 2000 date review and conversion project to
address all the necessary changes, testing and implementation issues. The
project encompasses three major areas of review: internal systems (hardware and
software), supplier compliance and Company products. The Company has identified
the changes required to its computer programs and hardware. The necessary
modifications to the Company's centralized financial, manufacturing and
operational information systems are expected to be completed by the end of
calendar year 1998. To date, the Company's suppliers have been sent letters
requesting information regarding their own Year 2000 plan, as well as requesting
confirmation that the components supplied by these vendors are Year 2000
compliant. The Company has evaluated the vendor responses which have been
received and concluded that the vendors which have responded either are Year
2000 compliant or are proceeding with their own Year 2000 compliance programs.
The Company will continue to follow-up with vendors with which the Company has a
material relationship and who have not responded to obtain assurances that they
expect to be Year 2000 compliant in time. Equipment and systems manufactured and
supplied by the Company have been evaluated and determined to be free of any
material problems that could be caused by the Year 2000 issue. Management
estimates that the Company's remaining Year 2000 compliance expense will be
approximately $110,000. To date, the Company believes that Year 2000 problems
related to its own internal systems and equipment and systems it sells will not
have a material effect on the Company's business, financial condition and
results of operations. However, there can be no assurance that the systems of
other companies upon which the Company's systems and business rely will be
timely converted or
                                       23
<PAGE>   24
 
that any such failure to convert by another company would not have a material
adverse effect on the Company's business, financial conditions or results of
operations.
 
     To date, the management of the Far East Joint Venture has, in response to a
request by the Company, completed a review of their Year 2000 compliance issue
and has determined that there is not expected to be material adverse effects on
its results of operations as a result thereof.
 
                                       24
<PAGE>   25
 
                CERTAIN FACTORS AFFECTING THE COMPANY'S BUSINESS
 
     Discussed below are certain factors which may affect the Company's
business. This discussion is not exclusive of other factors that may also affect
the Company's business and should be read in conjunction with the other
information contained in this Form 10-K including, without limitation,
information provided in "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
 
DEPENDENCE ON CMP SYSTEMS
 
     The Company believes that its future growth, if any, depends in large part
upon its ability to grow revenues attributable to its CMP systems and its
technology. Revenue growth attributable to the Company's CMP systems depends
upon numerous factors, including cost of ownership, throughput, process
flexibility, performance and reliability and availability of customer support.
The Company intends to periodically develop and introduce enhanced versions of
its CMP system. Failure to continually develop the Company's CMP system may
impact its ability to grow revenue attributable to its CMP systems. In addition,
the continuing slow down in the semiconductor industry impacts the Company's
ability to recognize consistent growth in revenue attributable to CMP systems.
There can be no assurance that the Company will be successful in growing revenue
attributable to its current CMP systems, or any future enhanced version of the
system. The failure of the Company to accomplish these objectives would have a
material adverse effect on the Company. See "-- Dependence on New Product
Development; Rapid Technological Change."
 
DEPENDENCE ON NEW PRODUCT DEVELOPMENT; RAPID TECHNOLOGICAL CHANGE
 
     The Company believes that its future success will depend, in part, on its
ability to enhance existing products and processes and develop and manufacture
new products and processes. The markets in which the Company and its customers
compete are characterized by evolving industry standards and frequent
improvements in products and services. To compete effectively in such markets,
the Company must continually improve its products and its process technologies
and develop new technologies and products that compete effectively on the basis
of price and performance. The Company expects to continue to make significant
investments in research, development and engineering even during economic down
turns in the markets the Company serves, or if such investments negatively
impact operating profits in a reporting period. There can be no assurance that
the Company will be able to improve its existing products and its process
technologies or develop new products and technologies. The Company intends to
continually develop and/or introduce enhanced versions of its integrated CMP
system. There can be no assurance that the Company's development of new or
enhanced products, such as enhanced versions of the CMP system, will be
cost-effective or introduced in a timely manner or accepted in the marketplace.
Failure by the Company to develop or introduce new products and product
enhancements in a timely manner would have a material adverse effect on the
Company's business, financial condition and results of operations.
 
     Due to the complexity of the Company's products, significant delays can
occur between a system's introduction and the commencement of commercial
shipments. The Company has from time to time experienced delays in the
introduction of, and certain technical and manufacturing difficulties with,
certain of its systems and enhancements, and may experience such delays and
technical and manufacturing difficulties in future introductions or volume
production of new systems or enhancements. In addition, the Company may incur
substantial unanticipated costs to ensure the functionality and reliability of
its future product introductions early in the product's life cycle. If new
products experience reliability or quality problems, the Company could encounter
a number of problems, including reduced orders, higher manufacturing costs,
delays in collection of accounts receivable and additional service and warranty
expenses, each of which could materially adversely affect the Company's business
and results of operations. In addition, in the event the Company does not manage
product transitions successfully, sales of existing Company products could be
adversely affected. See "Business -- Research, Development and Engineering."
 
                                       25
<PAGE>   26
 
CYCLICAL NATURE OF THE COMPANY'S BUSINESS
 
     The Company's business depends substantially on the capital expenditures of
semiconductor, thin film memory disk media and silicon wafer manufacturers (its
primary markets), which, in turn, depend upon the current and anticipated market
demand for semiconductor devices, memory disks and silicon wafers. Sales of
capital equipment to these manufacturers are expected to continue to represent a
significant portion of the Company's total revenue. These industries are highly
cyclical and have historically experienced periodic downturns characterized by
oversupply and weak demand, which often have a material adverse effect on the
acquisition of capital equipment and other products used in the manufacturing
process, including products offered by the Company. These downturns generally
have materially adversely affected the business and operating results of capital
equipment suppliers, including the Company. The semiconductor, thin film memory
disk and silicon wafer industries are currently experiencing downturns which
have led many semiconductor, memory disk and silicon wafer manufacturers to
delay or cancel capital expenditures. The Company's business and results of
operations will continue to be materially adversely affected by these downturns
in its primary markets.
 
     Sales of the Company's capital equipment depend, in large part, upon the
decision of a prospective customer to increase manufacturing capacity or respond
to advances in technology by upgrading or expanding existing manufacturing
facilities or constructing new manufacturing facilities, all of which typically
involve a significant capital commitment. Certain of the Company's capital
equipment have lengthy sales cycles while the customer evaluates and receives
approvals for the purchase of the Company's systems and completes the upgrading
or expansion of existing facilities or the construction of new facilities. The
Company may expend substantial funds and management effort during the sales
cycle. The cyclicality and rapid technological change present in certain of the
industries served by the Company may also cause prospective customers to
postpone decisions regarding major capital expenditures, including purchases of
the Company's equipment. In addition, the need for continued investment in
research and development, marketing and customer support limits the Company's
ability to reduce expenses in response to downturns in the industries it serves.
 
INTERNATIONAL BUSINESS
 
     In fiscal 1998, 1997 and 1996, 31.7%, 31.2% and 21.7%, respectively, of the
Company's total revenue was attributable to sales outside the United States. In
addition, under certain circumstances, products sold to U.S. customers are
shipped to those customers' overseas facilities. The Company expects that
international sales will continue to represent a significant portion of its
total revenue. Sales to customers outside the United States are subject to
numerous risks, including exposure to currency fluctuations, the imposition of
government controls, the need to comply with a wide variety of foreign and U.S.
export laws, political and economic instability, trade restrictions, changes in
tariffs and taxes typically associated with foreign sales, the greater
difficulty of administering business overseas and general economic conditions.
In addition, the laws of certain foreign countries may not protect the Company's
intellectual property to the same extent as do the laws of the United States.
Moreover, slurries marketed and distributed by both the Company and the Fujimi
Joint Venture are purchased from Fujimi Incorporated, a Japanese company. The
Company also purchases in Japanese yen certain equipment from the Far East Joint
Venture that the Company then sells in the U.S. and Europe. Fluctuations in
exchange rates have in the past resulted, and may in the future result, in
increases in the cost to the Company of such products. Also, because the value
of the net assets of the Company's foreign subsidiaries and its equity interest
in the Far East Joint Venture fluctuate based upon exchange rates and because
the Company does not hedge the value of such net assets, fluctuations in
exchange rates may have an adverse effect on the Company's stockholders' equity.
 
     The Company anticipates that the recent turmoil in Asian economies and the
recent deterioration of the underlying economic conditions in certain Asian
countries will continue to have an impact on its sales, and the sales of its
joint ventures, to customers located in or whose end-user customers are located
in those countries. In addition, revenue and profits may continue to be impacted
as a result of currency fluctuations on the relative price of the Company's
products, or the products of its joint ventures, and restrictions on government
spending. In addition, customers in those countries have faced reduced access to
working capital to fund purchases of the Company's products, or the products of
its joint ventures, due to higher interest rates, reduced
                                       26
<PAGE>   27
 
bank lending or the deterioration in the customer's or its bank's financial
condition or the inability to access other financing which has negatively
impacted sales to those customers.
 
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
 
     The Company's quarterly operating results have historically and may in the
future vary significantly due to a number of factors. Factors that may influence
the Company's operating results in a given quarter include: (i) customer demand,
such as economic conditions in the semiconductor, memory disk and silicon wafer
industries, market acceptance of products of both the Company and its customers,
changes in product mix, and the timing, cancellation or delay of customer orders
and shipments; (ii) competition, such as competitive pressures on prices of the
Company's products and the introduction or announcement of new products by
competitors; (iii) manufacturing and operations, such as fluctuations in
availability and cost of raw materials and production capacity; (iv)
fluctuations in foreign currency exchange rates; (v) new product development,
such as increased research, development and engineering, as well as marketing,
expenses associated with new product introductions, including the effect of
transitioning to new or enhanced products, and the Company's ability to
introduce new products and technologies on a timely basis; (vi) sales and
marketing, such as concentrations of customers, and discounts that may be
granted to certain customers; and (vii) the quarterly operating results of the
Company's joint ventures, which the Company accounts for on the equity method;
as well as other factors, such as levels of expenses relative to revenue levels,
personnel changes and generally prevailing economic conditions.
 
     During a given quarter, a significant portion of the Company's revenue may
be derived from the sale of a relatively small number of machines and systems.
Accordingly, a small change in the number of machines and systems actually
shipped may cause significant changes in operating results. Moreover, customers
may cancel or reschedule shipments, and production difficulties could delay
shipments. In addition, because of the significantly different gross margins
attributable to the Company's two segments, changes in product mix may cause
fluctuations in operating results. Further, the lengthy sales cycle for certain
of the Company's capital equipment may result in the Company incurring
significant expenses prior to the receipt of customer orders. In addition, the
introduction of new products has in the past contributed, and may continue to
contribute, to fluctuations in quarterly operating results. These same factors
also could materially and adversely affect annual results of operations. In
addition, the need for continued investment in research and development,
marketing and customer support limits the Company's ability to reduce expenses
in response to downturns in the industries it serves.
 
INTELLECTUAL PROPERTY RIGHTS
 
     The Company currently holds numerous United States patents and additional
foreign patents in Japan and several Asian and European countries and has
numerous United States and foreign patent applications pending. In addition, the
Company believes that such factors as continued innovation, technical expertise
and know-how of its personnel and other factors are also important. There can be
no assurance that the Company will be able to protect its technology or that
competitors will not be able to develop similar technology independently. No
assurance can be given that the claims allowed on any patents held or acquired
by the Company will be sufficiently broad to protect the Company's technologies.
In addition, no assurance can be given that any existing or future patents
issued to the Company will not be challenged, invalidated, or circumvented or
that the rights granted thereunder will provide competitive advantages to the
Company. In that event, the Company's results of operations could be adversely
affected. Moreover, the Company may choose to incur significant costs in an
attempt to defend its patent rights.
 
     In addition, although the Company believes that its products do not
infringe any valid existing proprietary rights of others, there can be no
assurance that third parties will not assert infringement claims in the future.
In the CMP market the Company serves, there are a number of patents relating to
the CMP process held by third parties. Accordingly, the Company, as a CMP
equipment manufacturer, may be required to attempt to obtain licenses from the
holders of one or more of such patents, which may impede the use of CMP
technology by the Company. There also may be pending patent applications or
issued patents of which the Company is not aware, and which would require the
Company to license or challenge such patents, at
                                       27
<PAGE>   28
 
significant expense to the Company. There can be no assurance that any such
license would be available on acceptable terms, if at all, or that the Company
would prevail in any such challenge. See "Business -- Intellectual Property."
 
POSSIBLE VOLATILITY OF STOCK PRICE
 
     The stock price of the Company may be subject to wide fluctuations and
possible rapid increases or declines in a short time period. These fluctuations
may be due to factors specific to the Company such as variations in quarterly
operating results or changes in analysts' earnings estimates, or to factors
relating to the industries in which the Company operates and sells or to the
securities markets in general, which, in recent years, have experienced
significant price fluctuations or to global economic events. These fluctuations
often have been unrelated to the operating performance of the specific companies
whose stocks are traded.
 
SOLE OR LIMITED SOURCES OF SUPPLY
 
     The Company relies to a substantial extent on outside suppliers to
manufacture many of the components and subassemblies used in the Company's
capital equipment, some of which are obtained from a single supplier or a
limited group of suppliers. The Company's reliance on outside suppliers
generally, and a sole or a limited group of suppliers in particular, involves
several risks, including a potential inability to obtain an adequate supply of
required components and reduced control over quality, pricing and timing of
delivery of components. In the past, the Company has experienced delays in
receiving materials from suppliers, sometimes resulting in delays in the
delivery of products by the Company. Such delays, or other significant supplier
or supply quality issues, may occur in the future, which could result in a
material adverse effect on the Company. Because the manufacture of certain of
these components and subassemblies is specialized and requires long lead times,
there can be no assurance that delays or shortages caused by suppliers will not
reoccur. Any inability to obtain adequate deliveries, or any other circumstance
that would require the Company to seek alternative sources of supply or to
manufacture such components internally, could delay shipment of the Company's
products, increase its cost of goods sold and have a material adverse effect on
the Company's business and results of operations. See "Business -- Manufacturing
and Suppliers."
 
     Certain statements in "Business," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Certain Factors Affecting
the Company's Business" constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements will generally be accompanied by words such as "anticipate,"
"believe," "estimate," "expect," or "project," or similar words or statements.
Although the Company believes that the expectations reflected in any such
forward-looking statements are reasonable; no assurance can be given that any
such expectations will prove correct. Such forward-looking statements involve
known and unknown risks, uncertainties and other factors including those
described above which may cause the actual results, performance or achievements
of the Company to be materially different from any future results, performance
or achievements expressed or implied by such forward-looking statements.
 
ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
 
     Not Applicable.
 
                                       28
<PAGE>   29
 
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
 
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
   
<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
SPEEDFAM INTERNATIONAL, INC. AND CONSOLIDATED SUBSIDIARIES
Independent Auditors' Report................................   30
Consolidated Balance Sheets -- at the end of fiscal years
  1998 and 1997.............................................   31
Consolidated Statements of Earnings -- for the fiscal years
  1998, 1997 and 1996.......................................   32
Consolidated Statements of Stockholders' Equity -- for the
  fiscal years 1998, 1997 and 1996..........................   33
Consolidated Statements of Cash Flows -- for the fiscal
  years 1998, 1997 and 1996.................................   34
Notes to Consolidated Financial Statements..................   35
SPEEDFAM CO., LTD. AND CONSOLIDATED SUBSIDIARIES
Independent Auditors' Report................................   53
Consolidated Balance Sheets -- at the end of fiscal years
  1998 and 1997.............................................   54
Consolidated Statements of Earnings -- for the fiscal years
  1998, 1997 and 1996.......................................   55
Consolidated Statements of Stockholders' Equity -- for the
  fiscal years 1998, 1997 and 1996..........................   56
Consolidated Statements of Cash Flows -- for the fiscal
  years 1998, 1997 and 1996.................................   57
Notes to Consolidated Financial Statements..................   58
</TABLE>
    
 
     The above consolidated financial statements of SpeedFam Co., Ltd. and
consolidated subsidiaries are included herein pursuant to Rule 3-09 of
Regulation S-X.
 
                                       29
<PAGE>   30
 
                          INDEPENDENT AUDITORS' REPORT
 
Board of Directors
SpeedFam International, Inc.:
 
     We have audited the accompanying consolidated balance sheets of SpeedFam
International, Inc. and consolidated subsidiaries as of May 31, 1998 and 1997,
and the related consolidated statements of earnings, stockholders' equity, and
cash flows for each of the years in the three-year period ended May 31, 1998.
These consolidated financial statements are the responsibility of the management
of SpeedFam International, Inc. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
 
     We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of SpeedFam
International, Inc. and consolidated subsidiaries as of May 31, 1998 and 1997,
and the results of their operations and their cash flows for each of the years
in the three-year period ended May 31, 1998 in conformity with generally
accepted accounting principles.
 
                                          KPMG PEAT MARWICK LLP
 
June 26, 1998
Chicago, Illinois
 
                                       30
<PAGE>   31
 
           SPEEDFAM INTERNATIONAL, INC. AND CONSOLIDATED SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
                             MAY 31, 1998 AND 1997
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                1998        1997
                                                              --------    --------
<S>                                                           <C>         <C>
                                      ASSETS
Current assets:
  Cash and cash equivalents.................................  $ 90,384    $ 56,679
  Short-term investments....................................    50,835      20,216
  Trade accounts receivable, less allowance for doubtful
     accounts of $2,737 in 1998 and $1,144 in 1997..........    45,197      38,021
  Inventories...............................................    55,532      35,849
  Deferred income taxes.....................................     3,339       2,912
  Prepaid expenses and other current assets.................     4,856       2,038
                                                              --------    --------
Total current assets........................................   250,143     155,715
Investments in affiliates...................................    24,299      23,956
Property, plant, and equipment, net.........................    52,253      24,582
Other assets................................................     3,070       2,247
                                                              --------    --------
Total assets................................................  $329,765    $206,500
                                                              ========    ========
                       LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Current portion of long-term debt.........................  $    248    $    250
  Accounts payable..........................................    20,265      20,923
  Customer deposits.........................................     1,812       4,165
  Due to affiliates.........................................     3,636       4,824
  Accrued expenses..........................................    13,932      14,870
  Income taxes payable......................................        --       3,861
                                                              --------    --------
Total current liabilities...................................    39,893      48,893
                                                              --------    --------
Long-term liabilities:
  Long-term debt............................................        --         272
  Deferred income taxes.....................................     1,020         802
                                                              --------    --------
Total long-term liabilities.................................     1,020       1,074
                                                              --------    --------
Stockholders' equity:
  Common stock, no par value, 60,000 shares authorized,
     15,962 and 13,324 shares issued and outstanding at May
     31, 1998 and 1997, respectively........................         1           1
  Additional paid-in capital................................   226,729     105,522
  Retained earnings.........................................    62,329      49,466
  Cumulative foreign currency translation adjustments.......      (207)      1,544
                                                              --------    --------
Total stockholders' equity..................................   288,852     156,533
                                                              --------    --------
Total liabilities and stockholders' equity..................  $329,765    $206,500
                                                              ========    ========
</TABLE>
 
          See accompanying notes to consolidated financial statements.
                                       31
<PAGE>   32
 
           SPEEDFAM INTERNATIONAL, INC. AND CONSOLIDATED SUBSIDIARIES
 
                      CONSOLIDATED STATEMENTS OF EARNINGS
                    YEARS ENDED MAY 31, 1998, 1997, AND 1996
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                                               1998        1997        1996
                                                             --------    --------    --------
<S>                                                          <C>         <C>         <C>
Revenue:
  Net sales................................................  $176,247    $160,994    $113,880
  Commissions from affiliate...............................     9,009      12,430       6,290
                                                             --------    --------    --------
Total revenue..............................................   185,256     173,424     120,170
Cost of sales..............................................   109,751     103,501      78,661
                                                             --------    --------    --------
Gross margin...............................................    75,505      69,923      41,509
                                                             --------    --------    --------
Operating expenses:
  Research, development, and engineering...................    33,681      19,766      11,496
  Selling, general, and administrative.....................    35,880      28,671      18,922
                                                             --------    --------    --------
Total operating expenses...................................    69,561      48,437      30,418
                                                             --------    --------    --------
Operating profit...........................................     5,944      21,486      11,091
Other income (expense).....................................     5,957        (298)       (208)
                                                             --------    --------    --------
Earnings from consolidated companies before income taxes...    11,901      21,188      10,883
Income tax expense.........................................     3,456       8,037       4,266
                                                             --------    --------    --------
Earnings from consolidated companies.......................     8,445      13,151       6,617
Equity in net earnings of affiliates.......................     4,418       7,068       5,204
                                                             --------    --------    --------
Net earnings...............................................  $ 12,863    $ 20,219    $ 11,821
                                                             ========    ========    ========
Net earnings per share:
  Basic....................................................  $   0.86    $   1.78    $   1.27
                                                             ========    ========    ========
  Diluted..................................................  $   0.83    $   1.67    $   1.16
                                                             ========    ========    ========
Weighted average number of shares:
  Basic....................................................    14,971      11,349       9,344
                                                             ========    ========    ========
  Diluted..................................................    15,591      12,127      10,159
                                                             ========    ========    ========
</TABLE>
 
          See accompanying notes to consolidated financial statements.
                                       32
<PAGE>   33
 
           SPEEDFAM INTERNATIONAL, INC. AND CONSOLIDATED SUBSIDIARIES
 
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                    YEARS ENDED MAY 31, 1998, 1997, AND 1996
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                   CUMULATIVE
                                                                     FOREIGN
                                           ADDITIONAL               CURRENCY
                                  COMMON    PAID-IN     RETAINED   TRANSLATION   TREASURY
                                  STOCK     CAPITAL     EARNINGS   ADJUSTMENTS    STOCK      TOTAL
                                  ------   ----------   --------   -----------   --------   --------
<S>                               <C>      <C>          <C>        <C>           <C>        <C>
BALANCE AT MAY 31, 1995.........     1      $    828    $17,426      $ 7,991     $(3,209)   $ 23,037
Net earnings....................    --            --     11,821           --          --      11,821
Foreign currency translation
  adjustments...................    --            --         --       (3,374)         --      (3,374)
Sale of treasury stock..........    --            16         --           --           1          17
Retirement of treasury stock....    --        (3,208)        --           --       3,208          --
Issuance of common stock........    --        28,284         --           --          --      28,284
Exercise of stock options.......    --           254         --           --          --         254
                                    --      --------    -------      -------     -------    --------
BALANCE AT MAY 31, 1996.........     1        26,174     29,247        4,617          --      60,039
Net earnings....................    --            --     20,219           --          --      20,219
Foreign currency translation
  adjustments...................    --            --         --       (3,073)         --      (3,073)
Income tax benefit from exercise
  of stock options..............    --           194         --           --          --         194
Issuance of common stock........    --        77,673         --           --          --      77,673
Employee stock purchases........    --           887         --           --          --         887
Exercise of stock options.......    --           594         --           --          --         594
                                    --      --------    -------      -------     -------    --------
BALANCE AT MAY 31, 1997.........     1       105,522     49,466        1,544          --     156,533
                                    --      --------    -------      -------     -------    --------
Net earnings....................    --            --     12,863           --          --      12,863
Foreign currency translation
  adjustments...................    --            --         --       (1,751)         --      (1,751)
Income tax benefit from exercise
  of stock options..............    --           780         --           --          --         780
Issuance of common stock........    --       116,704         --           --          --     116,704
Employee stock purchases........    --         2,088         --           --          --       2,088
Exercise of stock options.......    --         1,635         --           --          --       1,635
                                    --      --------    -------      -------     -------    --------
BALANCE AT MAY 31, 1998.........     1      $226,729    $62,329      $  (207)    $    --    $288,852
                                    ==      ========    =======      =======     =======    ========
</TABLE>
 
          See accompanying notes to consolidated financial statements.
                                       33
<PAGE>   34
 
           SPEEDFAM INTERNATIONAL, INC. AND CONSOLIDATED SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                    YEARS ENDED MAY 31, 1998, 1997 AND 1996
                                 (IN THOUSANDS)
 
   
<TABLE>
<CAPTION>
                                                               1998        1997        1996
                                                             --------    --------    --------
<S>                                                          <C>         <C>         <C>
Cash flows from operating activities:
  Net earnings.............................................  $ 12,863    $ 20,219    $ 11,821
  Adjustments to reconcile net earnings to net cash
     provided by (used in) operating activities:
     Equity in net earnings of affiliates..................    (4,418)     (7,068)     (5,204)
     Depreciation and amortization.........................     4,525       2,846       1,326
     Provision for losses on accounts receivable...........     1,752         817         316
     Provision for deferred income taxes...................      (209)     (1,460)       (922)
     Gains on sales of assets..............................       (42)        (32)        (10)
     Increase in cash surrender value of life insurance....      (150)       (144)       (142)
     (Increase) decrease in assets:
       Trade accounts receivable...........................    (8,804)     (4,050)    (18,226)
       Inventories.........................................   (19,768)     (7,898)    (10,078)
       Prepaid expenses and other current assets...........    (2,813)       (749)         23
     Increase (decrease) in liabilities:
       Accounts payable and due to affiliates..............    (1,959)       (709)     10,621
       Accrued expenses and customer deposits..............    (3,331)      6,183       4,102
       Income taxes payable................................    (3,106)       (942)      4,290
                                                             --------    --------    --------
Net cash provided by (used in) operating activities........   (25,460)      7,013      (2,083)
                                                             --------    --------    --------
Cash flows from investing activities:
  Purchases of short-term investments......................   (63,636)    (20,216)         --
  Maturities of short-term investments.....................    33,017          --          --
  Capital expenditures.....................................   (32,071)    (17,431)     (8,121)
  Proceeds from sales of assets............................        61          75          24
  Dividends from affiliates................................     2,325         554         163
  Other investing activities...............................      (801)       (553)       (542)
                                                             --------    --------    --------
Net cash used in investing activities......................   (61,105)    (37,571)     (8,476)
                                                             --------    --------    --------
Cash flows from financing activities:
  Sale of treasury stock...................................        --          --          17
  Net proceeds from issuance of common stock...............   116,704      77,673      28,284
  Proceeds from exercise of stock options and employee
     stock purchases.......................................     3,723       1,481         254
  Proceeds from long-term debt.............................        --         414       3,999
  Principal payments on long-term debt.....................      (274)     (3,221)    (12,025)
                                                             --------    --------    --------
Net cash provided by financing activities..................   120,153      76,347      20,529
                                                             --------    --------    --------
Effect of foreign currency rate changes on cash............       117          19        (194)
                                                             --------    --------    --------
Net increase in cash and cash equivalents..................    33,705      45,808       9,776
Cash and cash equivalents at beginning of year.............    56,679      10,871       1,095
                                                             --------    --------    --------
Cash and cash equivalents at end of year...................  $ 90,384    $ 56,679    $ 10,871
                                                             ========    ========    ========
Supplemental cash flow information -- cash paid during the
  year for:
  Interest.................................................  $     47    $    226    $    810
  Income taxes.............................................     6,298      10,463         860
                                                             ========    ========    ========
</TABLE>
    
 
          See accompanying notes to consolidated financial statements.
                                       34
<PAGE>   35
 
           SPEEDFAM INTERNATIONAL, INC. AND CONSOLIDATED SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
     SpeedFam International, Inc. (the Company), an Illinois corporation,
designs, develops, manufactures, markets, and services chemical mechanical
polishing, or "CMP," systems used in the fabrication of semiconductor devices
and other high throughput, precision surface processing systems used in the
fabrication of thin film memory disk media, semiconductor wafers, and general
industrial components. In addition, the Company markets and distributes
slurries, parts, and expendables used in its customers' manufacturing processes.
The Company's customers are primarily located in the United States, Europe, and
the Far East.
 
  (a) Principles of Consolidation
 
     The consolidated financial statements include the accounts of the Company
and the following wholly owned subsidiaries:
 
<TABLE>
<CAPTION>
                       SUBSIDIARIES                           INCORPORATED
                       ------------                           ------------
<S>                                                          <C>
SpeedFam Corporation.......................................  United States
SpeedFam Limited...........................................  United Kingdom
SpeedFam GmbH..............................................  Germany
</TABLE>
 
     All significant intercompany balances and transactions have been
eliminated. Non-U.S. subsidiaries are included in the consolidated financial
statements based upon fiscal years ended April 30. The Company's fiscal year
ends on May 31.
 
     The Company's investments in the common stock of affiliates SpeedFam Co.,
Ltd. (a Japanese corporation, 50% owned) and Fujimi Corporation (an Illinois
corporation, 50% owned) are accounted for by the equity method using fiscal
years that end April 30 and May 31, respectively.
 
  (b) Cash and Cash Equivalents and Short-term Investments
 
     Cash and cash equivalents include deposits in banks and highly liquid
investments with original maturities of three months or less.
 
     All of the Company's short-term investments are classified as
held-to-maturity securities. These securities are recorded at amortized cost,
adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization and accretion, as well as any interest on the securities, is
included in interest income.
 
  (c) Inventories
 
     Inventories are stated at the lower of cost (first-in, first-out) or
market.
 
  (d) Property, Plant, and Equipment
 
     Property, plant, and equipment are stated at cost. Depreciation is provided
on the straight-line method over the estimated useful lives of the assets.
Depreciation expense was $4,394, $2,795, and $1,172 in fiscal years 1998, 1997,
and 1996, respectively. The estimated useful lives of the assets are as follows:
 
<TABLE>
<S>                                                           <C>
Buildings and improvements..................................  7 to 40 years
Machinery and equipment.....................................        5 years
Furniture and fixtures......................................   3 to 5 years
Leasehold improvements......................................  2 to 10 years
</TABLE>
 
                                       35
<PAGE>   36
           SPEEDFAM INTERNATIONAL, INC. AND CONSOLIDATED SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
  (e) Income Taxes
 
     Income taxes are accounted for under the asset and liability method. Under
the asset and liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
 
   
  (f) Revenue Recognition
    
 
   
     Sales of the Company's products are recorded upon customer acceptance, or
shipment if no customer acceptance is required, at which time title passes to
the customer. Customer acceptance refers to the sign off by the customer that
the equipment is complete and has passed all tests satisfactory to the customer.
Installation of the equipment is generally completed within 30 to 60 days of
acceptance.
    
 
   
  (g) Installation and Warranty Costs
    
 
   
     Costs to be incurred by the Company related to product installation and
warranty fulfillment are accrued at the date of customer acceptance, or shipment
if no customer acceptance is required, and are estimated by the Company based on
past experience. The accrual for product installation and warranty fulfillment,
included in accrued expenses in the consolidated balance sheets, was $5,628 and
$5,510 at the end of fiscal years 1998 and 1997, respectively.
    
 
  (h) Foreign Currency Translation
 
     Assets and liabilities of the Company's non-U.S. operations have been
translated using the exchange rates in effect at each balance sheet date.
Results of operations are translated using the average exchange rates prevailing
throughout each period. Local currencies are considered the functional
currencies of the Company's foreign entities. Foreign currency exchange rates
used to translate the financial statements are summarized below:
 
<TABLE>
<CAPTION>
                                                   FOREIGN CURRENCY PER U.S. DOLLAR
                                                   --------------------------------
                                                     1998        1997        1996
                                                   --------    --------    --------
<S>                                                <C>         <C>         <C>
Rates at balance sheet date:
  Pound sterling (L).............................      .60         .62         .66
  Deutsche mark (DM).............................     1.80        1.73        1.53
  Japanese yen (Y)...............................   132.83      127.09      105.07
</TABLE>
 
  (i) Treasury Stock
 
     The Company accounts for treasury stock using the cost method. All of the
Company's treasury stock was retired upon completion of the Company's initial
public offering of common stock in October, 1995 (see note 15).
 
  (j) Earnings Per Share
 
     In fiscal year 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings per Share." SFAS No. 128 replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
 
                                       36
<PAGE>   37
           SPEEDFAM INTERNATIONAL, INC. AND CONSOLIDATED SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
per share excludes any dilutive effects of options, warrants, and convertible
securities. Diluted earnings per share includes the effect of all potential
common shares that are dilutive and outstanding during the reporting period.
Earnings per share amounts for all periods presented have been restated to
conform to SFAS No. 128.
 
     The following table sets forth the computation of basic and diluted
earnings per share:
 
<TABLE>
<CAPTION>
                                                         1998       1997       1996
                                                        -------    -------    -------
<S>                                                     <C>        <C>        <C>
Numerator:
  Net earnings........................................  $12,863    $20,219    $11,821
                                                        =======    =======    =======
Denominator:
  Denominator for basic earnings per
     share -- weighted-average shares outstanding.....   14,971     11,349      9,344
  Effect of dilutive securities -- employee stock
     options..........................................      620        778        815
                                                        -------    -------    -------
  Denominator for diluted earnings per
     share -- adjusted weighted-average shares
     outstanding......................................   15,591     12,127     10,159
                                                        =======    =======    =======
Basic earnings per share..............................  $  0.86    $  1.78    $  1.27
                                                        =======    =======    =======
Diluted earnings per share............................  $  0.83    $  1.67    $  1.16
                                                        =======    =======    =======
</TABLE>
 
     Options to purchase 457 shares of common stock, at an average price of
$38.16 per share, were outstanding during 1998, but were not included in the
computation of diluted earnings per share because the options' exercise price
was greater than the average market price of the common shares and, therefore,
the effect would be antidilutive.
 
  (k) Significant Customers and Concentration of Credit Risk
 
     Presented below is a summary of net sales to and commissions earned from
significant customers as a percentage of total revenue. Net sales to and
commissions earned from these customers are from both of the Company's segments.
 
<TABLE>
<CAPTION>
CUSTOMER                                                  1998    1997    1996
--------                                                  ----    ----    ----
<S>                                                       <C>     <C>     <C>
A.......................................................   *       10%     18%
B.......................................................   *       13       *
</TABLE>
 
---------------
* Less than 10%.
 
  (l) Patents and Trademarks
 
     Patents and trademarks included in other assets, in the net amount of
$1,613 and $769 at the end of fiscal years 1998 and 1997, respectively, are
amortized on a straight-line basis over 17 years for patents and five years for
trademarks.
 
  (m) Research, Development, and Engineering
 
     Expenditures for research, development, and engineering of products and
processes are expensed as incurred.
 
                                       37
<PAGE>   38
           SPEEDFAM INTERNATIONAL, INC. AND CONSOLIDATED SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
  (n) Use of Estimates
 
     The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company's management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
 
  (o) Employee Stock Plans
 
     Effective June 1, 1996, the Company adopted Statement of Financing
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation."
In accordance with the provisions of SFAS No. 123, the Company applies
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations in accounting for its employee stock
option and stock purchase plans and, accordingly, does not recognize
compensation cost. As prescribed by SFAS No. 123, note 11 contains a summary of
the pro forma effects on reported net income and earnings per share for 1998,
1997 and 1996 as if the Company had elected to recognize compensation cost based
on the fair value of the options granted at grant date.
 
  (p) Derivative Financial Instruments
 
   
     The Company uses derivative financial instruments to offset exposure to
market risks arising from changes in foreign exchange rates. Derivative
financial instruments currently utilized by the Company primarily include
foreign currency forward contracts. The Company evaluates and monitors
consolidated net exposures by currency and maturity, and external derivative
financial instruments correlate with the net exposures in all material respects.
Gains and losses on hedges of existing assets and liabilities are included in
the carrying amounts of those assets or liabilities and are ultimately
recognized in income when those carrying amounts are converted. Gains or losses
related to hedges of firm commitments are deferred and included in the bases of
the transactions when they are completed. Gains or losses on unhedged foreign
currency transactions are included in income as part of cost of sales. Gains and
losses on derivative financial instruments which protect the Company from
exposure in a particular currency, but do not currently have a designated
underlying transaction, are also included in income as part of cost of sales. If
a hedged item matures, or is sold, extinguished, terminated, or is related to an
anticipated transaction that is no longer likely to take place, the derivative
financial instrument is closed and the related gain or loss is included in
income as part of cost of sales.
    
 
  (q) Reclassifications
 
     Certain reclassifications have been made in the fiscal 1997 and fiscal 1996
financial statements to conform to the fiscal 1998 presentation.
 
                                       38
<PAGE>   39
           SPEEDFAM INTERNATIONAL, INC. AND CONSOLIDATED SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
(2) SHORT-TERM INVESTMENTS
 
     The amortized cost, gross unrealized gains, gross unrealized losses, and
approximate fair value of short-term investments classified as held-to-maturity
are summarized as follows at May 31, 1998 and 1997:
 
<TABLE>
<CAPTION>
                                                                 1998
                                          --------------------------------------------------
                                                       GROSS         GROSS
                                                     UNREALIZED    UNREALIZED    APPROXIMATE
                                           COST        GAINS         LOSSES      FAIR VALUE
                                          -------    ----------    ----------    -----------
<S>                                       <C>        <C>           <C>           <C>
Municipal and state governments.........  $45,342       $46            $8          $45,380
Corporate debt securities and other.....    5,493         4             1            5,496
                                          -------       ---            --          -------
                                          $50,835       $50            $9          $50,876
                                          =======       ===            ==          =======
</TABLE>
 
<TABLE>
<CAPTION>
                                                                 1997
                                          --------------------------------------------------
                                                       GROSS         GROSS
                                                     UNREALIZED    UNREALIZED    APPROXIMATE
                                           COST        GAINS         LOSSES      FAIR VALUE
                                          -------    ----------    ----------    -----------
<S>                                       <C>        <C>           <C>           <C>
Municipal and state governments.........  $20,216       $--            $5          $20,211
                                          =======       ===            ==          =======
</TABLE>
 
(3) INVENTORIES
 
     Inventories at the end of fiscal years 1998 and 1997 are summarized as
follows:
 
<TABLE>
<CAPTION>
                                                            1998       1997
                                                           -------    -------
<S>                                                        <C>        <C>
Raw materials............................................  $25,223    $16,323
Work-in-process..........................................   11,423     16,030
Finished goods...........................................   18,886      3,496
                                                           -------    -------
Total inventories........................................  $55,532    $35,849
                                                           =======    =======
</TABLE>
 
(4) PROPERTY, PLANT, AND EQUIPMENT
 
     Property, plant, and equipment at the end of fiscal years 1998 and 1997 are
summarized as follows:
 
<TABLE>
<CAPTION>
                                                            1998       1997
                                                          --------    -------
<S>                                                       <C>         <C>
Land....................................................  $  8,507    $ 2,280
Buildings...............................................    19,097      2,156
Machinery and equipment.................................    25,141     11,321
Furniture and fixtures..................................     3,545      1,446
Leasehold improvements..................................       930        643
Construction in progress................................     6,167     13,832
                                                          --------    -------
                                                            63,387     31,678
Less accumulated depreciation...........................   (11,134)    (7,096)
                                                          --------    -------
Net property, plant, and equipment......................  $ 52,253    $24,582
                                                          ========    =======
</TABLE>
 
                                       39
<PAGE>   40
           SPEEDFAM INTERNATIONAL, INC. AND CONSOLIDATED SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
(5) INVESTMENTS IN AFFILIATES
 
     The Company owns a 50% interest in SpeedFam Co., Ltd. The Company's equity
investment in SpeedFam Co., Ltd. was $20,543 and $20,363 in 1998 and 1997,
respectively. SpeedFam Co., Ltd.'s consolidated financial statements include the
accounts of the following subsidiaries:
 
<TABLE>
<CAPTION>
                          COMPANY                              LOCATION
                          -------                              --------
<S>                                                           <C>
SpeedFam Clean System Co., Ltd..............................  Japan
Saku Seiki K.K..............................................  Japan
SpeedFam Incorporated.......................................  Taiwan
SpeedFam Korea Ltd..........................................  South Korea
SpeedFam India (Pvt.) Ltd...................................  India
SpeedFam (S.E.A.) Pte. Ltd..................................  Singapore
SpeedFam Malaysia SDN BHD...................................  Malaysia
</TABLE>
 
     Significant intercompany balances and transactions have been eliminated.
SpeedFam Co., Ltd.'s investments in three affiliated Japanese companies,
Met-Coil Ltd.; CRT K.K.; Clean Technology K.K.; and Xevios Corporation are
accounted for by the equity method.
 
                                       40
<PAGE>   41
           SPEEDFAM INTERNATIONAL, INC. AND CONSOLIDATED SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
     Condensed consolidated financial statements of SpeedFam Co. Ltd., are as
follows:
 
                                 BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                                   APRIL 30,
                                                              --------------------
                                                                1998        1997
                                                              --------    --------
<S>                                                           <C>         <C>
                                      ASSETS
Current assets:
  Cash and short-term investments...........................  $ 13,612    $  9,794
  Trade accounts receivable, net and due from affiliates....    89,359      77,380
  Inventories...............................................    20,723      25,063
  Prepaid expenses and other current assets.................     4,685       3,434
                                                              --------    --------
Total current assets........................................   128,379     115,671
Property, plant and equipment, net..........................    35,763      30,327
Other assets................................................     9,140       7,702
                                                              --------    --------
Total assets................................................  $173,282    $153,700
                                                              ========    ========
                       LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Short-term borrowings and current portion of long-term
     debt...................................................  $ 37,779    $ 15,841
  Accounts payable..........................................    58,440      64,523
  Accrued expenses..........................................     6,656       9,969
  Income taxes payable......................................     3,890       5,701
                                                              --------    --------
Total current liabilities...................................   106,765      96,034
                                                              --------    --------
Long-term debt..............................................    18,945      10,786
Other long-term liabilities.................................     6,486       6,154
                                                              --------    --------
Total long-term liabilities.................................    25,431      16,940
                                                              --------    --------
Stockholders' equity........................................    41,086      40,726
                                                              --------    --------
Total liabilities and stockholders' equity..................  $173,282    $153,700
                                                              ========    ========
</TABLE>
 
                                       41
<PAGE>   42
           SPEEDFAM INTERNATIONAL, INC. AND CONSOLIDATED SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
                  STATEMENTS OF EARNINGS AND RETAINED EARNINGS
 
<TABLE>
<CAPTION>
                                                                  YEARS ENDED APRIL 30,
                                                             --------------------------------
                                                               1998        1997        1996
                                                             --------    --------    --------
<S>                                                          <C>         <C>         <C>
Net sales..................................................  $221,738    $220,281    $161,169
Costs and operating expenses...............................  (210,900)   (198,449)   (141,752)
                                                             --------    --------    --------
Earnings before income taxes...............................    10,838      21,832      19,417
Income taxes...............................................    (5,041)    (10,250)     (9,479)
                                                             --------    --------    --------
Net earnings before minority interest......................     5,797      11,582       9,938
Minority interest..........................................        66        (569)       (301)
                                                             --------    --------    --------
Net earnings...............................................     5,863      11,013       9,637
Retained earnings at beginning of year.....................    37,049      26,943      18,036
Common stock dividend......................................        --          --        (454)
Dividends..................................................    (1,750)       (907)       (276)
                                                             --------    --------    --------
Retained earnings at end of year...........................  $ 41,162    $ 37,049    $ 26,943
                                                             ========    ========    ========
</TABLE>
 
     The following is a summary of SpeedFam International, Inc. and consolidated
subsidiaries' transactions with SpeedFam Co., Ltd. and its subsidiaries.
 
<TABLE>
<CAPTION>
                                                               1998      1997       1996
                                                              ------    -------    ------
<S>                                                           <C>       <C>        <C>
Sales to SpeedFam Co., Ltd..................................  $  924    $ 1,520    $1,737
                                                              ======    =======    ======
Purchases from SpeedFam Co., Ltd............................  $6,344    $ 6,146    $7,612
                                                              ======    =======    ======
Commission revenue..........................................  $9,009    $12,430    $6,290
                                                              ======    =======    ======
Commission expense..........................................  $4,433    $ 2,707    $  582
                                                              ======    =======    ======
</TABLE>
 
     Net amounts due to SpeedFam Co., Ltd. included in the consolidated balance
sheets at the end of fiscal years 1998 and 1997 are $3,437 and $4,360,
respectively.
 
                                       42
<PAGE>   43
           SPEEDFAM INTERNATIONAL, INC. AND CONSOLIDATED SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
     The Company owns a 50% interest in Fujimi Corporation. The Company's equity
investment in Fujimi Corporation was $3,757 and $3,593 in 1998 and 1997,
respectively. Summary financial information relating to Fujimi Corporation is as
follows:
 
                                 BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                                   MAY 31,
                                                              ------------------
                                                               1998       1997
                                                              -------    -------
<S>                                                           <C>        <C>
                                     ASSETS
Current assets..............................................  $11,063    $13,346
Other assets................................................       30         16
                                                              -------    -------
Total assets................................................  $11,093    $13,362
                                                              =======    =======
                      LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities.................................................  $ 3,579    $ 6,177
Stockholders' equity........................................    7,514      7,185
                                                              -------    -------
Total liabilities and stockholders' equity..................  $11,093    $13,362
                                                              =======    =======
</TABLE>
 
                             STATEMENTS OF EARNINGS
 
<TABLE>
<CAPTION>
                                                                   YEARS ENDED MAY 31,
                                                             --------------------------------
                                                               1998        1997        1996
                                                             --------    --------    --------
<S>                                                          <C>         <C>         <C>
Net sales..................................................  $ 36,767    $ 36,556    $ 19,734
Costs and operating expenses...............................   (31,332)    (30,775)    (18,235)
                                                             --------    --------    --------
Earnings before income taxes...............................     5,435       5,781       1,499
Income taxes...............................................    (2,207)     (2,205)       (589)
                                                             --------    --------    --------
Net earnings...............................................  $  3,228    $  3,576    $    910
                                                             ========    ========    ========
</TABLE>
 
     The Company received dividends from Fujimi Corporation of $1,450, $100, and
$25 in 1998, 1997, and 1996, respectively. Purchases from Fujimi Corporation
approximated $2,271, $1,725, and $952 in 1998, 1997, and 1996, respectively.
Amounts due to Fujimi Corporation included in the consolidated balance sheets at
the end of fiscal years 1998 and 1997 are $199 and $464, respectively.
 
(6) INCOME TAXES
 
     The Company files consolidated U.S. Federal income tax returns with its
domestic subsidiary. Operations in the United Kingdom and Germany file local
income tax returns. Earnings from consolidated companies before income taxes are
as follows:
 
<TABLE>
<CAPTION>
                                                 1998       1997       1996
                                                -------    -------    -------
<S>                                             <C>        <C>        <C>
U.S...........................................  $ 9,495    $18,608    $ 9,380
Non-U.S.......................................    2,406      2,580      1,503
                                                -------    -------    -------
Total.........................................  $11,901    $21,188    $10,883
                                                =======    =======    =======
</TABLE>
 
                                       43
<PAGE>   44
           SPEEDFAM INTERNATIONAL, INC. AND CONSOLIDATED SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
     The provision (benefit) for income taxes is as follows:
 
<TABLE>
<CAPTION>
                                                   1998      1997       1996
                                                  ------    -------    ------
<S>                                               <C>       <C>        <C>
Current:
  U.S. Federal..................................  $2,348    $ 6,673    $3,693
  State.........................................     780      1,800       965
  Non-U.S.......................................     640      1,025       537
                                                  ------    -------    ------
                                                   3,768      9,498     5,195
                                                  ------    -------    ------
Deferred:
  U.S. Federal and state........................    (462)    (1,311)     (915)
  Non-U.S.......................................     150       (150)      (14)
                                                  ------    -------    ------
                                                    (312)    (1,461)     (929)
                                                  ------    -------    ------
Income tax expense..............................  $3,456    $ 8,037    $4,266
                                                  ======    =======    ======
</TABLE>
 
     The tax effects of temporary differences that give rise to the deferred tax
assets (liabilities) at the end of fiscal years 1998 and 1997 are attributable
to:
 
<TABLE>
<CAPTION>
                                                              1998      1997
                                                             ------    ------
<S>                                                          <C>       <C>
Property, plant, and equipment.............................  $ (936)   $ (789)
Inventory..................................................     586       352
Allowance for doubtful accounts............................     443       469
Trademark amortization.....................................     105        98
Warranty accrual...........................................   2,157     2,201
Other......................................................     (36)     (221)
                                                             ------    ------
Net deferred tax asset.....................................  $2,319    $2,110
                                                             ======    ======
</TABLE>
 
     The net deferred tax asset has been recorded on the balance sheet as
follows:
 
<TABLE>
<CAPTION>
                                                             1998       1997
                                                            -------    ------
<S>                                                         <C>        <C>
Current deferred tax asset................................  $ 3,339    $2,912
Long-term deferred tax liability..........................   (1,020)     (802)
                                                            -------    ------
                                                            $ 2,319    $2,110
                                                            =======    ======
</TABLE>
 
     There is no valuation allowance for deferred tax assets at the end of
fiscal years 1998 or 1997. Deferred tax assets are considered realizable due to
the expectation of future taxable income.
 
                                       44
<PAGE>   45
           SPEEDFAM INTERNATIONAL, INC. AND CONSOLIDATED SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
     A reconciliation between the Company's effective tax rate and the expected
tax rate on earnings before income taxes is as follows:
 
<TABLE>
<CAPTION>
                                                          1998    1997    1996
                                                          ----    ----    ----
<S>                                                       <C>     <C>     <C>
Expected income tax rate................................   34%     35%     34%
Dividend income from affiliates.........................    1       1      --
State taxes, net of U.S. Federal tax benefit............    4       6       4
Foreign sales corporation...............................   (5)     (1)     --
Research and development tax credits....................   --      (1)     --
Tax exempt investment securities........................   (9)     (2)     --
Meals and entertainment.................................    2      --      --
Other...................................................    2      --       1
                                                           --      --      --
Effective income tax rate...............................   29%     38%     39%
                                                           ==      ==      ==
</TABLE>
 
     No provision is made for income taxes on undistributed earnings of wholly
owned non-U.S. subsidiaries and SpeedFam Co., Ltd., because it is the Company's
present intention to reinvest substantially all the earnings of these
operations. At the end of fiscal year 1998, there was approximately $26,372 of
accumulated undistributed earnings of those operations. It is not practical for
the Company to compute the amount of unrecognized deferred tax liability on the
undistributed earnings.
 
(7) LONG-TERM DEBT
 
     The Company has a term loan payable in monthly installments of $26
(including interest at a fixed rate of 9.25%) beginning April 1, 1994 for five
years. The balance due is $248 and $522 at May 31, 1998 and 1997, respectively.
As all amounts due will be repaid during fiscal year 1999, the balance is shown
as a current liability at May 31, 1998. The term loan payable is secured by
certain machinery of SpeedFam Corporation.
 
     On August 29, 1997, the Company negotiated a new unsecured credit facility
with its U.S. bank group. The new credit agreement provides for a revolving loan
facility in the amount of $60,000 with a term of three years. If the loan is
utilized, principal will be repaid at the end of the loan term. Interest will
accrue and be paid monthly on the outstanding balance based on a 90 day LIBOR
rate plus 25 to 100 basis points. The Company must meet certain financial
objectives each year as defined in the credit agreement. At May 31, 1998, no
amounts were outstanding on this loan facility.
 
     On October 31, 1996, SpeedFam Limited in the United Kingdom, a wholly owned
subsidiary of SpeedFam International, Inc., entered into a L950 ($1,587)
multi-currency revolving line of credit with the London branch of a U.S. bank.
The revolving line of credit is secured by property and equipment of the
subsidiary and is payable on demand. If the line of credit is utilized, interest
will accrue on the outstanding balance at 2.0% above the bank's base rate (7.25%
and 6.0% at April 30, 1998 and 1997, respectively). As of April 30, 1998 and
1997, no amounts were outstanding on this credit facility.
 
(8) COMMITMENTS AND CONTINGENCIES
 
     During fiscal year 1996, the Company entered into a technology license
agreement related to the development of a new product introduced during fiscal
year 1997. The agreement obligates the Company to make annual royalty payments
of 5.5% of the Company's net sales of products using the licensed technology for
ten years. The annual royalty payments are subject to a minimum payment of $150
beginning in fiscal year 1998 and $200 for fiscal years 1999 to 2006.
 
                                       45
<PAGE>   46
           SPEEDFAM INTERNATIONAL, INC. AND CONSOLIDATED SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
     The Company and its subsidiaries occupy certain manufacturing and office
facilities and use certain equipment under noncancelable operating leases
expiring at various dates through fiscal year 2001. Rental expense aggregated
approximately $1,635, $1,235, and $917 in fiscal years 1998, 1997, and 1996,
respectively.
 
     Future minimum lease payments for all noncancelable operating leases having
remaining terms in excess of one year at the end of fiscal year 1998 are as
follows:
 
<TABLE>
<CAPTION>
YEAR                                                          AMOUNT
----                                                          ------
<S>                                                           <C>
1999........................................................  $1,907
2000........................................................   1,311
2001........................................................     787
2002........................................................     305
2003 and thereafter.........................................      66
                                                              ------
Total.......................................................  $4,376
                                                              ======
</TABLE>
 
(9) FORWARD EXCHANGE CONTRACTS
 
     The notional amounts of foreign exchange contracts as of May 31, 1998 and
May 31, 1997 were as follows:
 
<TABLE>
<CAPTION>
                                                             1998      1997
                                                            ------    -------
<S>                                                         <C>       <C>
Forward exchange contracts to buy foreign currency........  $2,833    $16,670
                                                            ======    =======
Forward exchange contracts to sell foreign currency.......  $1,637    $ 3,379
                                                            ======    =======
</TABLE>
 
     All currency forward contracts outstanding at May 31, 1998 have maturities
of less than one year and are primarily to buy or sell Japanese yen in exchange
for U.S. dollars. Management believes that these contracts should not subject
the Company to undue risk from foreign exchange movements, because gains and
losses on these contracts generally offset gains and losses on the assets,
liabilities, and transactions being hedged.
 
(10) SAVINGS AND PROFIT-SHARING PLANS
 
     The Company maintains defined-contribution savings and profit-sharing plans
for its employees. The plans cover certain employees who meet length of service
requirements. Expenses under the plans, determined by the Company's Board of
Directors, aggregated $143, $2,414, and $1,443 in fiscal years 1998, 1997, and
1996, respectively.
 
(11) STOCK OPTION PLANS
 
     The Company grants options to employees under the 1991 Employee Incentive
Stock Option Plan and the 1995 Stock Plan for Employees and Directors of the
Company. Under the plans, options may be granted to purchase up to 2,500,000
shares of the Company's authorized but unissued common stock. Prior to fiscal
year 1995, stock options were granted at 100% to 110% of the value of the
Company's common stock as determined by an established formula. In fiscal year
1995, stock options were granted at 100% to 110% of the fair value of the
Company's common stock as determined by an independent appraiser. Subsequent to
fiscal year 1995 stock options are granted at a price not less than the fair
market value on the date of grant. The stock options vest over five years (i.e.,
20% each year) with the exception of 163,800 stock options issued in 1992, which
vested immediately. The stock options expire 10 years after the grant date,
except for 71,100 stock options which expire five years after the grant date.
 
                                       46
<PAGE>   47
           SPEEDFAM INTERNATIONAL, INC. AND CONSOLIDATED SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
     The following table summarizes option activity and related information:
 
<TABLE>
<CAPTION>
                                                                           WEIGHTED AVERAGE
                                           OPTIONS     PRICE PER SHARE      EXERCISE PRICE
                                          ---------    ----------------    ----------------
<S>                                       <C>          <C>       <C>       <C>
BALANCE AT MAY 31, 1995.................  1,103,660    $  2.04 - $ 6.41         $ 2.87
  Granted...............................    330,976      10.75 -  20.50          20.07
  Exercised.............................   (127,668)      2.04 -   5.83           2.12
  Canceled or expired...................    (33,900)      2.04 -   5.83           2.25
                                          ---------    --------- ------         ------
BALANCE AT MAY 31, 1996.................  1,273,068       2.04 -  20.50           7.43
  Granted...............................    496,200      15.75 -  37.75          36.16
  Exercised.............................   (234,976)      2.04 -  18.25           2.53
  Canceled or expired...................    (12,360)      5.83 -  20.50          14.72
                                          ---------    --------- ------         ------
BALANCE AT MAY 31, 1997.................  1,521,932       2.04 -  37.75          17.17
  Granted...............................    557,420      19.50 -  59.00          23.01
  Exercised.............................   (222,013)      2.04 -  20.50           5.68
  Canceled or expired...................   (123,661)      2.04 -  56.50          22.59
                                          ---------    --------- ------         ------
BALANCE AT MAY 31, 1998.................  1,733,678    $  2.04 - $59.00         $20.13
                                          =========    ========= ======         ======
</TABLE>
 
     The following table summarizes information about stock options outstanding
at May 31, 1998:
 
<TABLE>
<CAPTION>
                                   WEIGHTED AVERAGE
                     OPTIONS          REMAINING          WEIGHTED         OPTIONS          WEIGHTED
   RANGE OF       OUTSTANDING AT   CONTRACTUAL LIFE      AVERAGE       EXERCISABLE AT      AVERAGE
EXERCISE PRICES    MAY 31, 1998        (YEARS)        EXERCISE PRICE    MAY 31, 1998    EXERCISE PRICE
---------------   --------------   ----------------   --------------   --------------   --------------
<S>               <C>              <C>                <C>              <C>              <C>
$ 2.04 - $ 2.41       335,900            5.27             $ 2.08          231,080           $ 2.08
$ 5.83 - $ 6.41       146,970            6.25               5.91           73,018             5.93
$10.75 - $15.75        29,400            8.05              14.31            6,200            14.19
$18.25 - $26.69       761,808            9.30              20.19           94,068            20.57
$32.50 - $46.75       421,950            9.00              36.59           86,189            36.45
$51.00 - $59.00        37,650            9.34              55.47               --               --
                    ---------            ----             ------          -------           ------
$ 2.04 - $59.00     1,733,678            8.17             $20.13          490,555           $12.39
                    =========            ====             ======          =======           ======
</TABLE>
 
     As permitted under SFAS No. 123, the Company has elected to follow APB No.
25 in accounting for stock-based awards to employees. Accordingly, no
compensation cost has been recognized for the stock option and stock purchase
plans. Had compensation cost for the Company's stock option and stock purchase
plans been determined based on the fair value at the grant date for awards in
fiscal years 1998, 1997 and 1996 consistent with the provisions of SFAS No. 123,
the Company's net income and earnings per share would have been reduced to the
pro forma amounts indicated below:
 
<TABLE>
<CAPTION>
                                                         1998       1997       1996
                                                        -------    -------    -------
<S>                                                     <C>        <C>        <C>
Net income as reported................................  $12,863    $20,219    $11,821
Pro forma net income..................................  $11,363    $19,537    $11,763
Basic earnings per share as reported..................  $  0.86    $  1.78    $  1.27
Basic pro forma earnings per share....................  $  0.76    $  1.72    $  1.26
Diluted earnings per share as reported................  $  0.83    $  1.67    $  1.16
Diluted pro forma earnings per share..................  $  0.73    $  1.61    $  1.16
</TABLE>
 
                                       47
<PAGE>   48
           SPEEDFAM INTERNATIONAL, INC. AND CONSOLIDATED SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
     In accordance with the provisions of SFAS No. 123, pro forma net income
reflects only options granted in fiscal years 1998, 1997 and 1996. Therefore,
the full impact of calculating compensation cost of options under SFAS No. 123
is not reflected in the pro forma net income amounts presented above because
compensation cost is reflected over the options vesting period of five years,
and compensation cost for options granted prior to June 1, 1995 is not
considered.
 
     In calculating pro forma compensation, the fair value of each option is
estimated on the date of grant using the Black-Scholes option-pricing model,
with the following weighted average assumptions for grants made in fiscal years
1998, 1997 and 1996.
 
<TABLE>
<CAPTION>
                                                   1998       1997       1996
                                                  -------    -------    -------
<S>                                               <C>        <C>        <C>
Dividend yield..................................     None       None       None
Expected volatility.............................       61%        56%        56%
Risk-free interest rate.........................     5.53%      6.38%      6.35%
Expected lives..................................  3 years    3 years    3 years
</TABLE>
 
     The weighted average fair value of options granted during the year was
$10.35 per share, $15.21 per share and $8.68 per share for fiscal years 1998,
1997 and 1996, respectively.
 
     The pro forma net income and earnings per share listed above includes
expense related to the Company's 1995 Employee Stock Purchase Plan. The fair
value of grants under the employee stock purchase plan is estimated on the grant
date using the Black-Scholes model with the following weighted average
assumptions for grants made in fiscal years 1998, 1997 and 1996:
 
<TABLE>
<CAPTION>
                                                      1998          1997          1996
                                                   ----------    ----------    ----------
<S>                                                <C>           <C>           <C>
Dividend yield...................................        None          None          None
Expected volatility..............................          61%           56%           56%
Risk-free interest rate..........................        5.32%         5.41%         5.33%
Expected lives...................................    1/2 year      1/2 year      1/2 year
</TABLE>
 
     The weighted average fair value of purchase rights granted during the year
was $7.06 per share, $6.48 per share and $3.30 per share for fiscal years 1998,
1997 and 1996, respectively.
 
(12) EMPLOYEE STOCK PURCHASE PLAN
 
     The Company's 1995 Employee Stock Purchase Plan qualifies under Section 423
of the Internal Revenue Code and the Company has reserved 500,000 shares of
common stock for issuance under the plan. The plan provides that eligible
employees may purchase stock at 85% of its fair value on specified dates. Under
the plan, the Company sold 89,751, 73,703, and -0- shares in fiscal years 1998,
1997, and 1996, respectively.
 
(13) BUSINESS SEGMENT INFORMATION
 
     The Company classifies its products into two core business segments: (i)
equipment, parts, and expendables, which is comprised of the Company's
operations in designing, developing, manufacturing, marketing, and servicing
high throughput, precision surface processing systems; and (ii) slurries, which
is
 
                                       48
<PAGE>   49
           SPEEDFAM INTERNATIONAL, INC. AND CONSOLIDATED SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
comprised of the distribution and sale of materials used in the customers'
manufacturing processes. Information concerning the Company's business segments
in fiscal years 1998, 1997, and 1996 is as follows:
 
<TABLE>
<CAPTION>
                                                       1998        1997        1996
                                                     --------    --------    --------
<S>                                                  <C>         <C>         <C>
Revenue:
  Sales to unaffiliated customers:
     Equipment, parts, and expendables.............  $147,444    $134,658    $ 88,050
     Slurries......................................    28,803      26,336      25,830
                                                     --------    --------    --------
  Total sales to unaffiliated customers............   176,247     160,994     113,880
                                                     --------    --------    --------
  Commissions from affiliate -- equipment, parts,
     and expendables...............................     9,009      12,430       6,290
                                                     --------    --------    --------
Total revenue......................................  $185,256    $173,424     120,170
                                                     ========    ========    ========
Segment operating profit:
  Equipment, parts, and expendables................  $  5,697    $ 24,328      14,585
  Slurries.........................................     1,786       2,363         572
                                                     --------    --------    --------
Total segment operating profit.....................     7,483      26,691      15,157
                                                     --------    --------    --------
General corporate income (expense).................     4,465      (5,300)     (3,583)
Interest expense...................................       (47)       (203)       (691)
                                                     --------    --------    --------
Earnings from consolidated companies before income
  taxes............................................  $ 11,901    $ 21,188    $ 10,883
                                                     ========    ========    ========
Identifiable assets:
  Equipment, parts, and expendables................  $132,293    $ 87,357    $ 62,177
  Slurries.........................................     9,427       8,460       8,836
  Investments in affiliates........................    24,299      23,956      20,450
  Corporate assets.................................   163,746      86,727      16,521
                                                     --------    --------    --------
Total identifiable assets..........................  $329,765    $206,500    $107,984
                                                     ========    ========    ========
Capital expenditures:
  Equipment, parts, and expendables................  $ 20,215    $ 15,162    $  5,197
  Slurries.........................................        99          94          35
  Corporate........................................    11,757       2,175       2,889
                                                     --------    --------    --------
Total capital expenditures.........................  $ 32,071    $ 17,431    $  8,121
                                                     ========    ========    ========
Depreciation expense:
  Equipment, parts, and expendables................  $  3,734    $  2,467    $  1,044
  Slurries.........................................        69          31          29
  Corporate........................................       591         297          99
                                                     --------    --------    --------
Total depreciation expense.........................  $  4,394    $  2,795    $  1,172
                                                     ========    ========    ========
</TABLE>
 
     Intersegment sales are not material. Segment operating profit represents
total revenue less cost of sales and operating expenses, and excludes equity in
net earnings of affiliates, general corporate expenses, interest income and
expense, and income taxes. Segment identifiable assets are those assets employed
in each segment's operation, including an allocated value. Corporate assets
consist primarily of cash and cash equivalents, investments, and other assets
not employed in production.
 
                                       49
<PAGE>   50
           SPEEDFAM INTERNATIONAL, INC. AND CONSOLIDATED SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
     Information regarding the Company's operations in the United States and
internationally is presented below:
 
   
<TABLE>
<CAPTION>
                                                       1998        1997        1996
                                                     --------    --------    --------
<S>                                                  <C>         <C>         <C>
Net sales:
  United States....................................  $166,855    $152,216    $103,698
  Europe...........................................    10,966       9,856      10,855
  Intercompany sales...............................    (1,574)     (1,078)       (673)
                                                     --------    --------    --------
Consolidated net sales.............................  $176,247    $160,994    $113,880
                                                     ========    ========    ========
Operating profit:
  United States....................................  $  3,791    $ 20,736      10,184
  Europe...........................................     2,059         780         917
  Eliminations.....................................        94         (30)        (10)
                                                     --------    --------    --------
Operating profit...................................  $  5,944    $ 21,486    $ 11,091
                                                     ========    ========    ========
  Identifiable assets:
  United States....................................  $132,468    $ 88,762      66,059
  Europe...........................................     9,222       7,055       4,954
  Corporate........................................   188,075     110,683      36,971
                                                     --------    --------    --------
Consolidated identifiable assets...................  $329,765    $206,500    $107,984
                                                     ========    ========    ========
Export sales:
  Taiwan...........................................  $ 15,254    $ 12,903    $  3,800
  England..........................................     7,524          --          --
  Germany..........................................     1,977       9,478       6,960
  Malaysia.........................................     1,653       7,854       1,806
  Other............................................     3,946       3,474         678
                                                     --------    --------    --------
                                                     $ 30,354    $ 33,709    $ 13,244
                                                     ========    ========    ========
</TABLE>
    
 
                                       50
<PAGE>   51
           SPEEDFAM INTERNATIONAL, INC. AND CONSOLIDATED SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
(14) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
 
     Following is a summary of unaudited quarterly information:
 
<TABLE>
<CAPTION>
                                               FIRST     SECOND      THIRD     FOURTH
                                              QUARTER    QUARTER    QUARTER    QUARTER
                                              -------    -------    -------    -------
<S>                                           <C>        <C>        <C>        <C>
Year ended May 31, 1997:
 
  Total revenue.............................  $39,728    $39,119    $45,280    $49,297
                                              =======    =======    =======    =======
  Gross margin..............................  $13,946    $15,027    $19,689    $21,261
                                              =======    =======    =======    =======
  Net earnings..............................  $ 4,038    $ 4,783    $ 4,909    $ 6,489
                                              =======    =======    =======    =======
  Basic earnings per share..................  $  0.38    $  0.45    $  0.45    $  0.49
                                              =======    =======    =======    =======
  Diluted earnings per share................  $  0.36    $  0.42    $  0.42    $  0.46
                                              =======    =======    =======    =======
Year ended May 31, 1998:
 
  Total revenue.............................  $53,847    $56,528    $48,380    $26,501
                                              =======    =======    =======    =======
  Gross margin..............................  $23,016    $24,759    $20,039    $ 7,691
                                              =======    =======    =======    =======
  Net earnings (loss).......................  $ 5,557    $ 7,620    $ 5,143    $(5,457)
                                              =======    =======    =======    =======
  Basic earnings (loss) per share...........  $  0.41    $  0.52    $  0.32    $ (0.34)
                                              =======    =======    =======    =======
  Diluted earnings (loss) per share.........  $  0.39    $  0.49    $  0.31    $ (0.34)
                                              =======    =======    =======    =======
</TABLE>
 
(15) OFFERINGS OF COMMON STOCK
 
     In October 1995, the Company completed its initial public offering of
common stock. The Company issued 2,928 shares of common stock and received
proceeds of $28,284, net of underwriters' discounts and commissions and offering
expenses.
 
     In February 1997, the Company completed an additional public offering of
common stock. The Company issued 2,500 shares of common stock and received
proceeds of $77,673, net of underwriters' discounts and commissions and offering
expenses.
 
     In October 1997, the Company completed a public offering of common stock.
The Company issued 2,327 shares of common stock and received proceeds of
$116,704, net of underwriters' discounts and commissions and offering expenses.
 
   
(16) FAIR VALUE OF FINANCIAL INSTRUMENTS
    
 
   
     The Company's financial instruments at May 31, 1998 and 1997 include cash
equivalents, short-term investments, trade receivables, trade payables, foreign
exchange contracts, and long-term debt. The carrying value of cash equivalents,
short-term investments, trade receivables, and trade payables approximates fair
value because of the short maturity of these instruments. Fair values relating
to foreign currency contracts (used for hedging purposes) reflect the estimated
net amounts that the Company would receive or pay to terminate the contracts at
the reporting date based on quoted market prices of comparable contracts and are
not material at May 31, 1998 and 1997. The fair value of the Company's long-term
debt is not materially different from its financial statement carrying value.
The fair value of the Company's long-term debt is estimated based on current
rates offered to the Company for debt of the same remaining maturities.
    
 
                                       51
<PAGE>   52
           SPEEDFAM INTERNATIONAL, INC. AND CONSOLIDATED SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
(17) OTHER INCOME (EXPENSE)
 
     Other income (expense) consisted of the following for fiscal years 1998,
1997, and 1996:
 
<TABLE>
<CAPTION>
                                                     1998      1997     1996
                                                    ------    ------    -----
<S>                                                 <C>       <C>       <C>
Net gain on sales of assets.......................  $   42    $   32    $  10
Expenses of canceled public offering..............      --      (493)      --
Interest income...................................   5,687     1,079      454
Interest expense..................................     (47)     (203)    (691)
Miscellaneous, net................................     275      (713)      19
                                                    ------    ------    -----
                                                    $5,957    $ (298)   $(208)
                                                    ======    ======    =====
</TABLE>
 
                                       52
<PAGE>   53
 
                          INDEPENDENT AUDITORS' REPORT
 
Board of Directors
SpeedFam Co., Ltd.:
 
     We have audited the accompanying consolidated balance sheets of SpeedFam
Co., Ltd. and subsidiaries as of April 30, 1998 and 1997, and the related
consolidated statements of earnings, stockholders' equity, and cash flows for
each of the years in the three-year period ended April 30, 1998. These
consolidated financial statements are the responsibility of the management of
SpeedFam Co., Ltd. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
 
     We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of SpeedFam
Co., Ltd. and subsidiaries as of April 30, 1998 and 1997, and the results of
their operations and their cash flows for each of the years in the three-year
period ended April 30, 1998, in conformity with generally accepted accounting
principles.
 
                                          KPMG PEAT MARWICK LLP
 
June 26, 1998
Chicago, Illinois
 
                                       53
<PAGE>   54
 
                      SPEEDFAM CO., LTD. AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
                            APRIL 30, 1998 AND 1997
                             (DOLLARS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                1998        1997
                                                              --------    --------
<S>                                                           <C>         <C>
                                      ASSETS
Current assets:
  Cash and cash equivalents.................................  $  8,883    $  7,097
  Short-term investments....................................     4,729       2,697
  Trade accounts and notes receivable, less allowance for
     doubtful accounts of $910 and $854 in 1998 and 1997,
     respectively...........................................    82,522      71,383
  Inventories...............................................    20,723      25,063
  Due from affiliated companies.............................     6,837       5,997
  Deferred income taxes.....................................     1,073       1,141
  Prepaid expenses and other current assets.................     3,612       2,293
                                                              --------    --------
Total current assets........................................   128,379     115,671
Investments in affiliates...................................       853         780
Property, plant, and equipment, net.........................    35,763      30,327
Deferred income taxes.......................................     2,164         961
Other assets................................................     6,123       5,961
                                                              --------    --------
                                                              $173,282    $153,700
                                                              ========    ========
                       LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Short-term borrowings.....................................  $ 33,075    $ 12,002
  Current portion of long-term debt.........................     4,411       3,677
  Current portion of obligations under capital leases.......       293         162
  Accounts payable..........................................    58,440      64,523
  Accrued expenses..........................................     6,656       9,969
  Income taxes payable......................................     3,890       5,701
                                                              --------    --------
Total current liabilities...................................   106,765      96,034
                                                              --------    --------
Long-term liabilities:
  Long-term debt............................................    18,095      10,128
  Obligations under capital leases..........................       850         658
  Liability for employee benefits...........................     5,126       4,049
  Minority interest.........................................     1,360       2,105
                                                              --------    --------
Total long-term liabilities.................................    25,431      16,940
                                                              --------    --------
Stockholders' equity:
  Common stock, $3 par value, 240,000 shares authorized,
     198,000 shares issued and outstanding at April 30, 1998
     and 1997...............................................       664         664
  Retained earnings.........................................    41,162      37,049
  Cumulative foreign currency translation adjustments.......      (844)      2,817
  Unrealized gains on marketable securities.................       104         196
                                                              --------    --------
Total stockholders' equity..................................    41,086      40,726
                                                              --------    --------
Total liabilities and stockholders' equity..................  $173,282    $153,700
                                                              ========    ========
</TABLE>
 
          See accompanying notes to consolidated financial statements.
                                       54
<PAGE>   55
 
                      SPEEDFAM CO., LTD. AND SUBSIDIARIES
 
                      CONSOLIDATED STATEMENTS OF EARNINGS
                   YEARS ENDED APRIL 30, 1998, 1997, AND 1996
                             (DOLLARS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                               1998        1997        1996
                                                             --------    --------    --------
<S>                                                          <C>         <C>         <C>
Net sales..................................................  $221,738    $220,281    $161,169
Cost of sales..............................................   165,152     153,508     106,912
                                                             --------    --------    --------
Gross margin...............................................    56,586      66,773      54,257
Selling, general, and administrative expenses..............    45,622      45,815      34,298
                                                             --------    --------    --------
Operating profit...........................................    10,964      20,958      19,959
                                                             --------    --------    --------
Other income (expense):
  Losses on sales of assets................................      (956)       (222)       (710)
  Equity in net earnings (loss) of affiliates..............       114          48        (203)
  Interest income..........................................       426         401         407
  Interest expense.........................................    (1,114)       (751)       (851)
  Miscellaneous, net.......................................     1,404       1,398         815
                                                             --------    --------    --------
                                                                 (126)        874        (542)
                                                             --------    --------    --------
Earnings before income taxes and minority interest.........    10,838      21,832      19,417
Income tax expense.........................................     5,041      10,250       9,479
                                                             --------    --------    --------
Earnings before minority interest..........................     5,797      11,582       9,938
Minority interest..........................................        66        (569)       (301)
                                                             --------    --------    --------
Net earnings...............................................  $  5,863    $ 11,013    $  9,637
                                                             ========    ========    ========
</TABLE>
 
          See accompanying notes to consolidated financial statements.
                                       55
<PAGE>   56
 
                      SPEEDFAM CO., LTD. AND SUBSIDIARIES
 
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                   YEARS ENDED APRIL 30, 1998, 1997, AND 1996
                             (DOLLARS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                              CUMULATIVE
                                                                FOREIGN
                                                               CURRENCY       UNREALIZED
                                          COMMON   RETAINED   TRANSLATION   GAINS (LOSSES)
                                          STOCK    EARNINGS   ADJUSTMENTS   ON SECURITIES     TOTAL
                                          ------   --------   -----------   --------------   -------
<S>                                       <C>      <C>        <C>           <C>              <C>
Balance at April 30, 1995...............   $210    $18,036      $15,954          $ 15        $34,215
Net earnings............................     --      9,637           --            --          9,637
Common stock dividend...................    454       (454)          --            --             --
Foreign currency translation
  adjustments...........................     --         --       (6,608)           --         (6,608)
Cash dividends..........................     --       (276)          --            --           (276)
Unrealized gains on securities..........     --         --           --           123            123
                                           ----    -------      -------          ----        -------
Balance at April 30, 1996...............    664     26,943        9,346           138         37,091
Net earnings............................     --     11,013           --            --         11,013
Foreign currency translation
  adjustments...........................     --         --       (6,529)           --         (6,529)
Cash dividends..........................     --       (907)          --            --           (907)
Unrealized gains on securities..........     --         --           --            58             58
                                           ----    -------      -------          ----        -------
Balance at April 30, 1997...............    664     37,049        2,817           196         40,726
Net earnings............................     --      5,863           --            --          5,863
Foreign currency translation
  adjustments...........................     --         --       (3,661)           --         (3,661)
Cash dividends..........................     --     (1,750)          --            --         (1,750)
Unrealized losses on securities.........     --         --           --           (92)           (92)
                                           ----    -------      -------          ----        -------
Balance at April 30, 1998...............   $664    $41,162      $  (844)         $104        $41,086
                                           ====    =======      =======          ====        =======
</TABLE>
 
          See accompanying notes to consolidated financial statements.
                                       56
<PAGE>   57
 
                      SPEEDFAM CO., LTD. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                   YEARS ENDED APRIL 30, 1998, 1997, AND 1996
                             (DOLLARS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                               1998        1997        1996
                                                             --------    --------    --------
<S>                                                          <C>         <C>         <C>
Cash flows from operating activities:
  Net earnings.............................................  $  5,863    $ 11,013    $  9,637
  Adjustments to reconcile net earnings to net cash
     provided by (used in) operating activities:
     Equity in net earnings (loss) of affiliates...........      (114)        (48)        203
     Depreciation and amortization.........................     5,338       3,699       2,267
     Benefit from deferred income taxes....................    (1,211)       (810)     (1,368)
     Losses on sales of assets.............................       956         222         710
     Other, net............................................       165         291         364
     Changes in net assets and liabilities:
       Trade accounts and notes receivable and due from
          affiliates.......................................   (16,949)    (29,579)    (18,608)
       Inventories.........................................     3,334      (9,288)    (11,661)
       Prepaid expenses and other assets...................    (2,389)     (1,679)     (2,462)
       Accounts payable....................................    (3,597)     27,212      22,102
       Accrued expenses and other liabilities..............    (2,391)      6,441       5,482
       Income taxes, net...................................    (1,585)     (2,053)      7,509
                                                             --------    --------    --------
Net cash provided by (used in) operating activities........   (12,580)      5,421      14,175
                                                             --------    --------    --------
Cash flows from investing activities:
  Capital expenditures.....................................   (14,351)    (18,135)     (7,129)
  Proceeds from sales of assets............................       572         454         283
  Other investing activities...............................    (2,503)        303       3,435
                                                             --------    --------    --------
Net cash used in investing activities......................   (16,282)    (17,378)     (3,411)
                                                             --------    --------    --------
Cash flows from financing activities:
  Dividends paid...........................................    (1,750)       (907)       (276)
  Short-term borrowings, net...............................    23,086       5,876      (4,824)
  Principal payments under capital lease obligations.......       546        (128)         --
  Proceeds from long-term debt.............................    13,866       8,226       2,528
  Principal payments on long-term borrowings...............    (3,909)     (3,350)     (3,176)
                                                             --------    --------    --------
Net cash provided by (used in) financing activities........    31,839       9,717      (5,748)
                                                             --------    --------    --------
Effect of foreign currency rate changes on cash............    (1,191)     (1,656)     (1,257)
                                                             --------    --------    --------
Net increase (decrease) in cash and cash equivalents.......     1,786      (3,896)      3,759
Cash and cash equivalents at beginning of year.............     7,097      10,993       7,234
                                                             --------    --------    --------
Cash and cash equivalents at end of year...................  $  8,883    $  7,097    $ 10,993
                                                             ========    ========    ========
Supplemental cash flow information:
  Cash paid during the year for:
     Interest..............................................  $  1,135    $    813    $    720
                                                             ========    ========    ========
     Income taxes..........................................  $  8,043    $ 12,794    $  3,389
                                                             ========    ========    ========
  Capital lease obligation increase during the period......  $    528    $  1,034    $     --
                                                             ========    ========    ========
</TABLE>
 
          See accompanying notes to consolidated financial statements.
                                       57
<PAGE>   58
 
                      SPEEDFAM CO., LTD. AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                            APRIL 30, 1998 AND 1997
                             (DOLLARS IN THOUSANDS)
 
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
     SpeedFam Co., Ltd. (the Company) was incorporated in 1971 as a joint
venture owned equally by two corporate shareholders, Obara Corporation, a
Japanese company, and SpeedFam International, Inc., a U.S. company.
 
     The Company and its domestic subsidiaries and affiliated companies conduct
operations primarily in Japan, but have subsidiaries and branches in Taiwan,
South Korea, India, Singapore, Hong Kong, Malaysia, and China.
 
     The Company and its subsidiaries and affiliates are engaged in the design,
engineering, manufacture, and distribution mainly of lapping and polishing
equipment and consumables, through-feed grinders, cleaning machines, and
measuring equipment used in high technology industries.
 
  (a) Basis of Presentation
 
     The Company and its consolidated Japanese subsidiaries maintain their books
of account in conformity with the financial accounting standards of Japan. The
Company's non-Japanese subsidiaries maintain their books of account in
conformity with the financial accounting standards of the countries in which
they are located. The consolidated financial statements presented herein in U.S.
dollars have been adjusted to conform to U.S. generally accepted accounting
principles.
 
  (b) Principles of Consolidation
 
     The consolidated financial statements include the accounts of the Company
and the following subsidiaries:
 
<TABLE>
<CAPTION>
                                                       PERCENTAGE OF                    FISCAL
                    SUBSIDIARIES                         OWNERSHIP       LOCATION      YEAR END
                    ------------                       -------------    -----------    --------
<S>                                                    <C>              <C>            <C>
SpeedFam Clean Systems Co., Ltd. ....................      62.50%(*)    Japan          March 31
Saku Seiki Co., Ltd. ................................      74.38(**)    Japan          March 31
SpeedFam Incorporated................................     100.00        Taiwan         March 31
SpeedFam Korea Ltd. .................................     100.00        South Korea    March 31
SpeedFam India (Pvt.) Ltd. ..........................      82.00        India          March 31
SpeedFam (Malaysia) SDN BHD..........................     100.00        Malaysia       March 31
SpeedFam (S.E.A.) Pte. Ltd. .........................     100.00        Singapore      March 31
</TABLE>
 
---------------
(*)  61.25% (1997 and 1996)
(**) 53.54% (1997 and 1996)
 
     All significant intercompany balances and transactions have been
eliminated. The Company's fiscal year ends on April 30.
 
     The Company's investments in the common stock of affiliates, Met Coil Ltd.
(50% owned); CRT K.K. (23.08% owned); and Xevios Corporation (50% owned,
acquired in fiscal year 1996), are accounted for by the equity method.
 
     The investment in Clean Technology K.K., a 27.5% owned affiliate of
SpeedFam Clean Systems Co., Ltd., and 22.5% owned directly by the Company, is
accounted for by the equity method.
 
                                       58
<PAGE>   59
                      SPEEDFAM CO., LTD. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                             (DOLLARS IN THOUSANDS)
 
  (c) Cash and Cash Equivalents
 
     Cash and cash equivalents include deposits in banks and highly liquid
short-term investments with original maturities of three months or less. These
highly liquid short-term investments are carried at cost which approximates
market.
 
  (d) Short-term Investments
 
     The Company classifies its debt and equity securities into one of three
categories: trading, available-for-sale, or held-to-maturity. Trading securities
are bought and held principally for the purpose of selling them in the near
term. Held-to-maturity securities are those securities in which the Company has
the ability and intent to hold the security until maturity. All other securities
not included in trading or held-to-maturity are classified as
available-for-sale.
 
     Trading and available-for-sale securities are recorded at fair value.
Held-to-maturity securities are recorded at amortized cost, adjusted for the
amortization or accretion of premiums or discounts. Unrealized holding gains and
losses, net of the related tax effect, on available-for-sale securities are
excluded from earnings and are reported as a separate component of stockholders'
equity until realized. Realized gains and losses from the sale of
available-for-sale securities are determined on a specific identification basis.
 
     A decline in the market value of any available-for-sale or held-to-maturity
security below cost that is deemed to be other than temporary results in a
reduction in carrying amount to fair value. The impairment is charged to
earnings and a new cost basis for the security is established. Premiums and
discounts are amortized or accreted over the life of the related
held-to-maturity security as an adjustment to yield using the effective interest
method. Dividend and interest income are recognized when earned.
 
  (e) Property, Plant, and Equipment
 
     Property, plant, and equipment are stated at cost. Depreciation is provided
on the declining balance method over the estimated useful lives of the assets.
Depreciation expense was $5,256, $3,542 and $2,148 in fiscal years 1998, 1997,
and 1996, respectively. The estimated useful lives of the assets are as follows:
 
<TABLE>
<S>                                                             <C>
Buildings and improvements..................................    5 to 65 years
Machinery and equipment.....................................    3 to 13 years
Furniture and fixtures......................................    2 to 20 years
Leasehold improvements......................................     2 to 5 years
</TABLE>
 
  (f) Inventories
 
     Inventories are stated at the lower of cost, determined principally by the
first-in, first-out (FIFO) method, or market.
 
  (g) Income Taxes
 
     Income taxes are accounted for under the asset and liability method. Under
the asset and liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
 
                                       59
<PAGE>   60
                      SPEEDFAM CO., LTD. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                             (DOLLARS IN THOUSANDS)
 
  (h) Revenue Recognition
 
     Sales of the Company's products are recorded upon shipment.
 
  (i) Warranty Costs
 
     Generally, the Company provides a one-year warranty against manufacturer's
defects on all machines sold. Provision for warranty expense is provided based
upon an estimate derived from historical experience factors.
 
  (j) Foreign Currency Translation
 
     Assets and liabilities of the Company's non-Japanese operations have been
translated using the exchange rates in effect at the balance sheet dates or
balance sheet date of the subsidiary, if different. Results of operations are
translated using the average exchange rates prevailing throughout the period.
Local currencies are considered the functional currencies of the Company's
non-Japanese entities. Foreign currency exchange rates used to translate the
financial statements are summarized below:
 
<TABLE>
<CAPTION>
                                                  JAPANESE YEN PER FOREIGN CURRENCY
                                                 ------------------------------------
                                                    1998         1997         1996
                                                 ----------    ---------    ---------
<S>                                              <C>           <C>          <C>
Rates at balance sheet date:
  South Korean won (March).....................  10.25/100     13.91/100    13.78/100
  Taiwan dollar (NT$) (March)..................     4.00         4.49         3.91
  India rupee (RPS) (March)....................     3.28         3.39         3.06
  Singapore dollar (S$)........................    83.04         87.36        74.09
  Thailand baht................................     3.41         4.56         4.15
  U.S. dollar..................................    132.40       127.09       105.07
</TABLE>
 
  (k) Significant Customer
 
     The Company had sales to a Japanese company that amounted to approximately
20.3%, 12.5%, and 11.2% of net sales in fiscal years 1998, 1997, and 1996,
respectively.
 
  (l) Research and Development
 
     Research and development expense amounted to approximately $7,481, $11,488,
and $6,651 in fiscal years 1998, 1997, and 1996, respectively. Such expenditures
are expensed as incurred.
 
  (m) Use of Estimates
 
     The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company's management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
 
  (n) Reclassifications
 
     Certain amounts in the fiscal year 1997 and 1996 financial statements have
been reclassified to conform with the fiscal year 1998 financial statement
presentation.
 
                                       60
<PAGE>   61
                      SPEEDFAM CO., LTD. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                             (DOLLARS IN THOUSANDS)
 
  (o) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
 
     The Company's long-lived assets and certain identifiable intangibles are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
an asset to future net cash flows (undiscounted and without interest charges)
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceed the fair value of the assets.
 
     Assets to be disposed of are reported at the lower of the carrying amount
or fair value less costs to sell.
 
(2) INVENTORIES
 
     Inventories at the end of fiscal years 1998 and 1997 are summarized as
follows:
 
<TABLE>
<CAPTION>
                                                               1998       1997
                                                              -------    -------
<S>                                                           <C>        <C>
Raw materials...............................................  $ 1,001    $   732
Work-in-process.............................................   13,788     20,760
Finished goods..............................................    5,934      3,571
                                                              -------    -------
          Total inventories.................................  $20,723    $25,063
                                                              =======    =======
</TABLE>
 
(3) INVESTMENTS
 
     Investments at the end of fiscal years 1998 and 1997 are summarized as
follows:
 
<TABLE>
<CAPTION>
                                                               1998      1997
                                                              ------    ------
<S>                                                           <C>       <C>
Held-to-maturity debt securities, at amortized cost.........  $  111    $  115
Time deposits...............................................   4,618     2,582
                                                              ------    ------
          Total short-term investments......................   4,729     2,697
Available-for-sale equity securities, at fair value,
  included in other assets..................................     582       762
                                                              ------    ------
          Total investments.................................  $5,311    $3,459
                                                              ======    ======
</TABLE>
 
     The amortized cost, gross unrealized holding gains, gross unrealized
holding losses, and fair value of available-for-sale and held-to-maturity
securities at the end of fiscal years 1998 and 1997 are as follows:
 
<TABLE>
<CAPTION>
                                                              GROSS         GROSS
                                                            UNREALIZED    UNREALIZED
                                               AMORTIZED     HOLDING       HOLDING      FAIR
                                                 COST         GAINS         LOSSES      VALUE
                                               ---------    ----------    ----------    -----
<S>                                            <C>          <C>           <C>           <C>
1998:
Available-for-sale equity securities.........    $445          $194          $(57)      $582
Held-to-maturity debt securities.............    $111          $ --          $ --       $111
1997:
Available-for-sale equity securities.........    $436          $351          $(25)      $762
Held-to-maturity debt securities.............    $115          $ --          $ --       $115
</TABLE>
 
     No investments classified as available-for-sale were sold during fiscal
years 1998 and 1997. The Company does not hold securities for trading purposes.
 
                                       61
<PAGE>   62
                      SPEEDFAM CO., LTD. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                             (DOLLARS IN THOUSANDS)
 
(4) PROPERTY, PLANT, AND EQUIPMENT
 
     Property, plant, and equipment at the end of fiscal years 1998 and 1997 are
summarized as follows:
 
<TABLE>
<CAPTION>
                                                                1998        1997
                                                              --------    --------
<S>                                                           <C>         <C>
  Land......................................................  $ 11,351    $  6,548
  Buildings and improvements................................    15,153      14,864
  Machinery and equipment...................................    23,202      18,870
  Furniture and fixtures....................................     3,723       3,592
  Construction in progress..................................       469       1,344
                                                              --------    --------
                                                                53,898      45,218
  Less accumulated depreciation.............................   (18,135)    (14,891)
                                                              --------    --------
  Net property, plant, and equipment........................  $ 35,763    $ 30,327
                                                              ========    ========
</TABLE>
 
(5) INCOME TAXES
 
     Earnings before income taxes and minority interest are as follows:
 
<TABLE>
<CAPTION>
                                                         1998       1997       1996
                                                        -------    -------    -------
<S>                                                     <C>        <C>        <C>
Japan.................................................  $ 4,429    $16,592    $15,135
Non-Japan.............................................    6,409      5,240      4,282
                                                        -------    -------    -------
          Total.......................................  $10,838    $21,832    $19,417
                                                        =======    =======    =======
</TABLE>
 
     The provision (benefit) for income taxes is as follows:
 
<TABLE>
<CAPTION>
                                                         1998       1997       1996
                                                        -------    -------    -------
<S>                                                     <C>        <C>        <C>
Current:
  Japan...............................................  $ 4,604    $ 9,699    $ 9,546
  Non-Japan...........................................    1,648      1,361      1,301
                                                        -------    -------    -------
                                                          6,252     11,060     10,847
Deferred:
  Japan...............................................   (1,291)      (810)    (1,360)
  Non-Japan...........................................       80         --         (8)
                                                        -------    -------    -------
          Total.......................................  $ 5,041    $10,250    $ 9,479
                                                        =======    =======    =======
</TABLE>
 
                                       62
<PAGE>   63
                      SPEEDFAM CO., LTD. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                             (DOLLARS IN THOUSANDS)
 
     The tax effects of temporary differences that give rise to the deferred tax
assets at the end of fiscal years 1998 and 1997 are attributable to:
 
<TABLE>
<CAPTION>
                                                               1998      1997
                                                              ------    ------
<S>                                                           <C>       <C>
Property, plant, and equipment..............................  $ (153)   $ (397)
Inventory...................................................     426       104
Allowance for doubtful accounts.............................     (35)      (50)
Accrued employee benefits...................................   1,880     1,515
Accrued vacation............................................     215       167
Business tax................................................     265       599
Long-term prepaid expenses..................................     183        --
Net operating loss carryforwards............................     383        --
Valuation allowance.........................................    (378)       --
Other.......................................................     451       164
                                                              ------    ------
Net deferred tax asset......................................  $3,237    $2,102
                                                              ======    ======
Current deferred tax asset..................................   1,073     1,141
Noncurrent deferred tax asset...............................   2,164       961
                                                              ------    ------
Net deferred tax asset......................................  $3,237    $2,102
                                                              ======    ======
</TABLE>
 
     The Company recorded a valuation allowance of $378 for deferred tax assets
at the end of fiscal year 1998. There was no valuation allowance at the end of
fiscal year 1997. Net deferred tax assets are considered realizable due to the
expectation of future taxable income. Deferred income tax benefits included as a
component of stockholders' equity related to unrealized gains and losses on
marketable securities aggregated $69 and $184 at the end of fiscal years 1998
and 1997, respectively.
 
     At April 30, 1998, certain subsidiaries have net operating loss
carryforwards for income tax purposes of $878 which are available to offset
future taxable income, if any, through fiscal year 2003.
 
     Amendments to Japanese tax regulations were enacted into law on March 31,
1998. As a result of these amendments, the normal income tax rate was reduced
from approximately 51% to 47% effective beginning with the Company's fiscal year
1999. Current income taxes were calculated at the rate of 51% in effect for
fiscal year 1998. Deferred income taxes were calculated at the rate of 47%.
 
     A reconciliation between the Company's effective tax rate and the expected
tax rate of 51% in Japan on earnings before income taxes and minority interest
is as follows:
 
<TABLE>
<CAPTION>
                                                              1998    1997    1996
                                                              ----    ----    ----
<S>                                                           <C>     <C>     <C>
Expected income tax rate....................................   51%     51%     51%
Expenses not deductible for tax purposes....................    5       4       4
Equity in earnings of affiliates............................   (1)     --       1
Differences of non-Japan and "expected" tax rates...........  (15)     (6)     (5)
Tax credit for research and development.....................   --      (3)     (3)
Effect of the income tax rate reduction.....................    3      --      --
Increase in the valuation allowance.........................    4      --      --
Other, net..................................................   --       1       1
                                                              ---      --      --
Effective income tax rate...................................   47%     47%     49%
                                                              ===      ==      ==
</TABLE>
 
                                       63
<PAGE>   64
                      SPEEDFAM CO., LTD. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                             (DOLLARS IN THOUSANDS)
 
     No provision is made for income taxes on undistributed earnings of
non-Japan subsidiaries. The Company believes that the amount of income taxes
that would be incurred if these earnings were remitted would not be significant
because of available tax credits.
 
     The Company's corporate tax returns through the end of fiscal year 1997
have been examined by the Japanese tax authorities.
 
(6) SHORT-TERM BORROWINGS
 
     Short-term borrowings are summarized as follows:
 
<TABLE>
<CAPTION>
                                                               1998       1997
                                                              -------    -------
<S>                                                           <C>        <C>
Bank borrowings, including overdraft........................  $26,915    $ 7,312
Trade notes discounted at banks, with recourse..............    6,160      4,690
                                                              -------    -------
                                                              $33,075    $12,002
                                                              =======    =======
</TABLE>
 
     Short-term borrowings are secured by trade notes receivable with a net book
value of $6,160 at the end of fiscal year 1998. The short-term borrowings had
weighted average interest rates of 1.65%, 1.89%, and 2.34% in fiscal years 1998,
1997, and 1996, respectively.
 
(7) LONG-TERM DEBT
 
     Long-term debt consists of the following:
 
<TABLE>
<CAPTION>
                                                               1998       1997
                                                              -------    -------
<S>                                                           <C>        <C>
Mortgage debentures:
  2nd Series, due September 1999, fixed interest rate of
     5.7%...................................................  $ 2,259    $ 2,360
  3rd Series, due December 2000, fixed interest rate of
     1.7%...................................................      753        787
Loans from banks and other financial institutions, maturing
  1998 to 2004, with weighted average interest rates of
  2.75% and 2.23% in 1998 and 1997, respectively............   19,494     10,658
                                                              -------    -------
Total long-term debt........................................   22,506     13,805
Less current portion of long-term debt......................    4,411      3,677
                                                              -------    -------
Net long-term debt..........................................  $18,095    $10,128
                                                              =======    =======
</TABLE>
 
     The mortgage debentures are secured by land and buildings with a net book
value of $3,147 at the end of fiscal year 1998.
 
     At the end of fiscal year 1998, the Company has provided guarantees for up
to $201 of bank borrowings by SpeedFam India (Pvt.) Ltd., a subsidiary of the
Company. The Company does not anticipate any loss from these arrangements.
 
                                       64
<PAGE>   65
                      SPEEDFAM CO., LTD. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                             (DOLLARS IN THOUSANDS)
 
     Annual maturities of long-term debt are as follows:
 
<TABLE>
<CAPTION>
FISCAL YEAR                                                     AMOUNT
-----------                                                     -------
<S>                                                             <C>
1999........................................................    $ 4,411
2000........................................................      5,114
2001........................................................      3,337
2002........................................................      2,293
2003 and thereafter.........................................      7,351
                                                                -------
                                                                $22,506
                                                                =======
</TABLE>
 
(8) CAPITAL LEASE
 
     The Company is obligated under various capital leases for certain equipment
which expire at various dates during the next five years. At the end of fiscal
year 1998, the gross amount of equipment and related accumulated amortization
recorded under capital leases was as follows:
 
<TABLE>
<S>                                                             <C>
Equipment...................................................    $1,550
     Less accumulated amortization..........................      (326)
                                                                ------
                                                                $1,224
                                                                ======
</TABLE>
 
     Amortization of assets held under capital leases is included within
depreciation expense. Future minimum capital lease payments as of the end of
fiscal year 1998 are as follows:
 
<TABLE>
<CAPTION>
FISCAL YEAR                                                     AMOUNT
-----------                                                     ------
<S>                                                             <C>
1999........................................................    $  331
2000........................................................       331
2001........................................................       331
2002........................................................       201
2003........................................................        34
                                                                ------
Total minimum lease payments................................     1,228
Less amount representing interest (at rate of 2.04%)........       (85)
                                                                ------
Present value of net minimum capital lease payments.........     1,143
Less current installments of obligations under capital
  leases....................................................      (293)
                                                                ------
Obligation under capital leases, excluding current
  installments..............................................    $  850
                                                                ======
</TABLE>
 
(9) COMMITMENTS AND CONTINGENCIES
 
     The Company and its subsidiaries occupy certain manufacturing and office
facilities and use certain equipment under noncancelable operating leases
expiring at various dates through fiscal year 2003. Rental expense aggregated
approximately $1,861 $1,728, and $1,635 in fiscal years 1998, 1997, and 1996,
respectively.
 
                                       65
<PAGE>   66
                      SPEEDFAM CO., LTD. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                             (DOLLARS IN THOUSANDS)
 
     Future minimum lease payments for all noncancelable operating leases having
a remaining term in excess of one year at the end of fiscal year 1998 are as
follows:
 
<TABLE>
<CAPTION>
FISCAL YEAR                                                     AMOUNT
-----------                                                     ------
<S>                                                             <C>
1999........................................................    $  825
2000........................................................       684
2001........................................................       349
2002........................................................       144
2003 and thereafter.........................................        54
                                                                ------
          Total.............................................    $2,056
                                                                ======
</TABLE>
 
(10) PENSION AND SEVERANCE BENEFITS
 
     The Company maintains pension and severance benefit plans for its
employees. Employees who leave the Company upon retirement because of age or
sever their connection with the Company for reasons other than dismissal for
cause are entitled to lump-sum payments based on their current rate of pay and
length of service.
 
     Effective June 1, 1984 the Company adopted an insured pension plan which
also covers employees of SpeedFam Clean Systems Co., Ltd., the terms of which
provide for the ultimate funding of retirement benefits when due. Premiums paid
under the insured plan constitute the funding of the current costs of the
liability under the plan and the funding of the related past service costs over
a 15-year period.
 
     The funded status of the insured pension plan at the end of fiscal years
1998 and 1997 is as follows:
 
<TABLE>
<CAPTION>
                                                               1998       1997
                                                              -------    -------
<S>                                                           <C>        <C>
Actuarial present value of benefit obligations:
  Vested benefits...........................................  $(1,472)   $(1,197)
  Nonvested benefits........................................     (178)       (53)
                                                              -------    -------
Accumulated benefit obligation..............................  $(1,650)   $(1,250)
                                                              =======    =======
Projected benefit obligation................................  $(2,211)   $(1,662)
Plan assets at fair value...................................    1,619      1,579
                                                              -------    -------
Projected benefit obligation in excess of plan assets.......     (592)       (83)
Unrecognized net loss.......................................      509         25
Unrecognized net obligation at transition...................      121        140
Additional minimum liabilities..............................      (71)        --
                                                              -------    -------
Prepaid (accrued) pension cost..............................  $   (33)   $    82
                                                              =======    =======
</TABLE>
 
                                       66
<PAGE>   67
                      SPEEDFAM CO., LTD. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                             (DOLLARS IN THOUSANDS)
 
     The components of net periodic pension cost for the insured pension plan
are shown below:
 
<TABLE>
<CAPTION>
                                                              1998    1997    1996
                                                              ----    ----    ----
<S>                                                           <C>     <C>     <C>
Service cost for benefits earned during the year............  $177    $150    $176
Interest cost on projected benefit obligation...............    90      79      87
Actual return on plan assets................................   (40)    (14)    (39)
Net amortization and deferral...............................     4     (16)     10
                                                              ----    ----    ----
                                                              $231    $199    $234
                                                              ====    ====    ====
Significant actuarial assumptions:
  Discount rate.............................................   3.5%    5.5%    5.5%
  Rate of salary increase...................................   2.8%    3.0%    3.0%
  Expected long-term return on plan assets..................   2.8%    3.0%    3.0%
</TABLE>
 
     Plan assets represent the Company's share of funds invested by a trustee in
pooled accounts comprised of cash in banks, securities, and real estate.
 
     A separate retirement benefits program for directors and statutory auditors
is not covered by the pension plan described above. The program provides that
directors and statutory auditors who retire or sever their connection with the
Company are entitled to lump-sum payments based on current rates of pay,
determined according to their title and the length of service. Directors and
statutory auditors may also be granted, at the discretion of the Company,
additional lump-sum payments for meritorious service. It is not the policy of
the Company to fund these retirement and severance benefits, but provision has
been made in the financial statements for the estimated accrued liabilities
under the plan. The liability related to these retirement benefits included in
the accompanying consolidated balance sheets at the end of fiscal years 1998 and
1997 amounted to $4,905 and $3,820, respectively. The plan was amended during
fiscal year 1996 and the resulting past service costs of $1,008 are being
amortized over a period of five years. Unamortized past service cost at the end
of fiscal years 1998 and 1997 amounting to $349 and $548, respectively, is
classified as other assets in the accompanying consolidated balance sheets. The
retirement benefit expenses amounted to $1,492, $1,545, and $520 in fiscal years
1998, 1997, and 1996, respectively.
 
     Two subsidiaries of the Company have separate employee retirement and
severance plan arrangements. Payments with respect to voluntary severance are
less in amount than payments for involuntary severance and retirement. The
subsidiaries have recorded estimated liabilities in the accompanying
consolidated balance sheets at the end of fiscal years 1998 and 1997 of $221 and
$229, respectively, based upon the amount, net of the benefits to be paid by a
government-sponsored small enterprise mutual aid retirement fund, which would be
payable if all employees had to retire voluntarily. Plan assets plus the accrued
liability approximate vested benefits. The expense related to these employee
retirement and severance plans amounted to $28, $67, and $222 in fiscal years
1998, 1997, and 1996, respectively. The Company believes that the effect of not
adopting SFAS No. 87, "Employers' Accounting for Pensions," for these plans is
not material to the consolidated financial statements.
 
(11) LEGAL RESERVE AND CASH DIVIDENDS
 
     The Japanese Commercial Code provides that earnings in an amount equal to
at least 10% of retained earnings be appropriated as a legal reserve, until such
reserve equals 25% of stated common stock. This legal reserve is not available
for dividends but may be used to reduce a deficit or may be transferred to
stated common stock. Certain non-Japanese subsidiaries are also required to
appropriate their earnings to legal reserves under the laws of the respective
countries in which they operate. The legal reserve included as a
 
                                       67
<PAGE>   68
                      SPEEDFAM CO., LTD. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                             (DOLLARS IN THOUSANDS)
 
component of retained earnings at the end of fiscal years 1998 and 1997 amounted
to $670 and $523, respectively.
 
     The accompanying consolidated financial statements do not reflect dividends
of $1,118 ($5.65 per share) declared subsequent to fiscal year 1998 by the Board
of Directors related to fiscal year 1998.
 
(12) RELATED-PARTY TRANSACTIONS
 
     The following is a summary of SpeedFam Co., Ltd. and consolidated
subsidiaries' transactions with SpeedFam International, Inc.:
 
<TABLE>
<CAPTION>
                                                         1998       1997       1996
                                                        -------    -------    -------
<S>                                                     <C>        <C>        <C>
Sales to SpeedFam International, Inc..................  $30,239    $42,531    $29,213
Purchases from SpeedFam International, Inc............  $ 1,279    $ 2,127    $ 1,680
Commission income.....................................  $ 4,316    $ 3,044    $ 1,072
Commission expense....................................  $   426    $   107    $    29
</TABLE>
 
     The following is summary of SpeedFam Co., Ltd. transactions with Met-Coil
Ltd., a 50% owned affiliate, accounted for by the equity method:
 
<TABLE>
<CAPTION>
                                                            1998      1997      1996
                                                           ------    ------    ------
<S>                                                        <C>       <C>       <C>
Sales to Met-Coil Ltd....................................  $  597    $  275    $  865
Purchases from Met-Coil Ltd..............................  $1,944    $2,125    $1,026
</TABLE>
 
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS
 
     The Company's financial instruments at April 30, 1998 and 1997 include cash
equivalents, trade receivables, short-term investments, short-term borrowings,
trade payables, noncurrent receivables, long-term debt, and obligations under
capital leases. The carrying amount of cash equivalents, trade receivables,
short-term borrowings, and trade payables approximates fair value because of the
short maturity of these instruments. The fair value of short-term investments
has been determined based on quoted market prices and approximates their
financial statement carrying values. The fair value of the Company's noncurrent
receivables and long-term debt has been determined based on discounted cash
flows using current interest rates of similar instruments, and is not materially
different from their financial statement carrying values.
 
(14) SUBSEQUENT EVENT (UNAUDITED)
 
     Subsequent to year end, the yen has experienced a devaluation against the
U.S. dollar. The yen has been devalued from 132 yen/dollar as of April 30, 1998
to approximately 143 yen/dollar as of August 20, 1998. This devaluation of the
yen resulted in a reduction in stockholders' equity of approximately $3 million
as of August 20, 1998. It is not possible to determine what impact, if any, the
devaluation will have on the Company's 1999 operating results.
 
                                       68
<PAGE>   69
 
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
 
     None.
 
                                    PART III
 
ITEM 10, 11, 12 AND 13.
 
     These items, constituting Part III of the Form 10-K, have been omitted from
this annual report pursuant to the provisions of Instruction G to Form 10-K,
because a definitive proxy statement (which is incorporated herein by reference,
except for the report of the compensation committee of the board of directors
and the performance graph) will be filed on or about September 8, 1998.
Information required for executive officers is included in Part I, Item 1.
 
                                    PART IV
 
ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
 
     (a)  (1) Financial Statements:
 
               See Part II, Item 8.
 
          (2) Financial Statement Schedules:
 
<TABLE>
<CAPTION>
                                                                PAGE
                                                                ----
 <S>                                                            <C>
 Independent Auditors' Report...............................    S-1
 Schedule I.................................................    S-2
 Schedule II................................................    S-4
</TABLE>
 
          (3) Exhibits filed:
 
               See Exhibit Index.
 
     (b) Reports filed on Form 8-K:
 
        None.
 
     (c) Exhibits filed:
 
        See Exhibit Index.
 
     (d) Financial Statements Omitted from Annual Report to Security Holders:
 
        Financial Statements of SpeedFam Co., Ltd. are filed herein. See Part
II, Item 8.
 
                                       69
<PAGE>   70
 
                                   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.
 
                                          SPEEDFAM INTERNATIONAL, INC.
 
                                          By: /s/ ROGER K. MARACH
                                            ------------------------------------
                                            Roger K. Marach
                                            Treasurer, Assistant Secretary
                                            and Chief Financial Officer
                                            (Principal financial and
                                            accounting officer)
 
     PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN
THE CAPACITIES AND ON THE DATES INDICATED.
 
   
<TABLE>
<CAPTION>
                        NAME                                         TITLE                        DATE
                        ----                                         -----                        ----
<C>                                                    <S>                                 <C>
 
                 /s/ JAMES N. FARLEY                   Chairman and Director               March 4, 1999
-----------------------------------------------------
                   James N. Farley
 
               /s/ RICHARD J. FAUBERT                  President, Chief Executive Officer  March 4, 1999
-----------------------------------------------------  and Director
                 Richard J. Faubert
 
                 /s/ ROGER K. MARACH                   Treasurer, Assistant Secretary and  March 4, 1999
-----------------------------------------------------  Chief Financial Officer (Principal
                   Roger K. Marach                     financial and accounting officer)
 
                  /s/ NEIL R. BONKE                    Director                            March 4, 1999
-----------------------------------------------------
                    Neil R. Bonke
 
                 /s/ MAKOTO KOUZUMA                    Director                            March 4, 1999
-----------------------------------------------------
                   Makoto Kouzuma
 
                                                       Director                            March 4, 1999
-----------------------------------------------------
                   Stuart L. Meyer
 
                /s/ ROBERT M. MILLER                   Director                            March 4, 1999
-----------------------------------------------------
                  Robert M. Miller
 
                 /s/ RICHARD S. HILL                   Director                            March 4, 1999
-----------------------------------------------------
                   Richard S. Hill
</TABLE>
    
 
                                       70
<PAGE>   71
 
                                 EXHIBIT INDEX
 
<TABLE>
<CAPTION>
EXHIBIT
NUMBER                            DESCRIPTION
-------                           -----------
<C>       <S>
 3.1      Articles of Incorporation of the Registrant (incorporated by
          reference to Exhibit 3.1 to the Registrant's Registration
          Statement on Form S-1, File No. 33-95628).
 3.2      Amendment to Articles of Incorporation of the Registrant
          (incorporated by reference to Exhibit 3 to the Registrant's
          Form 10-Q for the period ended November 30, 1997, File No.
          0-26784).
 3.3      Amended Bylaws of the Registrant (incorporated by reference
          to Exhibit 3.2 to the Registrant's Form 10-K for fiscal
          1996, File No. 0-26784).
10.1      Amendment No. 1 dated January 25, 1998, to Amended and
          Restated Revolving Credit Agreement between the Registrant
          and Firstar Bank Milwaukee, N.A., the First National Bank of
          Chicago, Bank of America National Trust and Savings
          Association and Norwest Bank Arizona, N.A. (incorporated by
          reference to Exhibit 10 to the Registrant's Form 10-Q for
          the period ended February 28, 1998, File No. 0-26784).
10.2      Amended and Restated Credit Agreement dated as of August 29,
          1997, between the Registrant and Firstar Bank Milwaukee,
          N.A., the First National Bank of Chicago, Bank of America
          National Trust and Savings Association and Norwest Bank
          Arizona, N.A. (incorporated by reference to Exhibit 10.1 to
          the Registrant's Form S-3, File No. 0-26784).
10.3      Multi-Currency Revolving Line of Credit between the
          Registrant's Subsidiary and the First National Bank of
          Chicago, dated October 31, 1996 (incorporated by reference
          to Exhibit 10 to the Registrant's Form 10-Q for the period
          ended November 30, 1996, File No. 0-26784).
10.4      Joint Venture Agreement between the Registrant and Obara
          Corporation, dated November 14, 1970 (incorporated by
          reference to Exhibit 10.3 to the Registrant's Registration
          Statement on Form S-1, File No. 33-95628).
10.5      License and Technical Service Agreement between the
          Registrant and SpeedFam Co., Ltd., dated November 14, 1970
          (incorporated by reference to Exhibit 10.4 to the
          Registrant's Registration Statement on Form S-1, File No.
          33-95628).
10.6      Amendment to License and Technical Service Agreement between
          the Registrant and SpeedFam Co., Ltd., dated July 24, 1995
          (incorporated by reference to Exhibit 10.5 to the
          Registrant's Registration Statement on Form S-1, File No.
          33-95628).
10.7      Joint Venture Agreement between the Registrant and Fujimi
          Incorporated, dated September 7, 1984 (incorporated by
          reference to Exhibit 10.6 to the Registrant's Registration
          Statement on Form S-1, File No. 33-95628).
10.8      Distributorship Agreement between the Registrant and Fujimi
          Incorporated, dated October 1, 1994 (incorporated by
          reference to Exhibit 10.7 to the Registrant's Registration
          Statement on Form S-1, File No. 33-95628).
10.9      Amendment to Distributorship Agreement between the
          Registrant and Fujimi Incorporated, dated August 3, 1995
          (incorporated by reference to Exhibit 10.8 to the
          Registrant's Registration Statement on Form S-1, File No.
          33-95628).
10.10     1991 Employee Incentive Stock Option Plan as amended and
          restated July 27, 1995 and as further amended as of May 22,
          1997 (incorporated by reference to Exhibit 10.10 to the
          Registrant's Form 10-K for fiscal 1997, File No. 0-26784).
10.11     1995 Stock Plan for Employees and Director of SpeedFam
          International, Inc. as amended as of May 22, 1997
          (incorporated by reference to Exhibit 10.11 to the
          Registrants Form 10-K for fiscal 1997, File No. 0-26784).
10.12     Registrant's 1995 Stock Purchase Plan (incorporated by
          reference to Exhibit 10.11 to the Registrant's Registration
          Statement on Form S-1, File No. 33-95628).
</TABLE>
 
                                       71
<PAGE>   72
 
<TABLE>
<CAPTION>
EXHIBIT
NUMBER                            DESCRIPTION
-------                           -----------
<C>       <S>
10.13     SpeedFam Employees' Savings and Profit Sharing Plan and
          Trust, as amended and restated June 1, 1989 (incorporated by
          reference to Exhibit 10.12 to the Registrant's Registration
          Statement on Form S-1, File No. 33-95628).
10.14     Employment Agreement between the Registrant and James N.
          Farley.
10.15     Employment Agreement between the Registrant and Makoto
          Kouzuma.
10.16     Employment Agreement between the Registrant and Roger K.
          Marach.
10.17     Employment Agreement between the Registrant and Robert R.
          Smith.
10.18     Form of Agreement between Registrant and SpeedFam Co., Ltd.
          with respect to services provided by Makoto Kouzuma.
21.1      Subsidiaries of the Registrant (incorporated by reference to
          Exhibit 21.1 to the Registrant's Registration Statement on
          Form S-1, File No. 33-95628).
23.1      Consent of KPMG Peat Marwick LLP.
27.1      Financial Data Schedule.
</TABLE>
 
                                       72
<PAGE>   73
 
                          INDEPENDENT AUDITORS' REPORT
 
The Board of Directors
SpeedFam International, Inc.:
 
     Under date of June 26, 1998, we reported on the consolidated balance sheets
of SpeedFam International, Inc. and consolidated subsidiaries as of May 31, 1998
and 1997, and the related consolidated statements of earnings, stockholders'
equity, and cash flows for each of the years in the three-year period ended May
31, 1998, which are included in this Form 10-K. In connection with our audits of
the aforementioned consolidated financial statements, we also audited the
related consolidated financial statement schedule as listed in Item 14(a)(2) of
this Form 10-K. This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits.
 
     In our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
 
                                          KPMG PEAT MARWICK LLP
 
June 26, 1998
Chicago, Illinois
 
                                       S-1
<PAGE>   74
 
                                                                     SCHEDULE II
 
                          SPEEDFAM INTERNATIONAL, INC.
 
                       VALUATION AND QUALIFYING ACCOUNTS
       FOR EACH OF THE YEARS IN THE THREE-YEAR PERIOD ENDED MAY 31, 1998
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                   CHARGED TO
                                                                 OTHER ACCOUNTS
                                                     CHARGED      (TRANSLATION      DEDUCTIONS
                                       BALANCE AT    TO COSTS     ADJUSTMENTS      (WRITE-OFFS     BALANCE
                                       BEGINNING       AND            AND              AND         AT END
             DESCRIPTION                OF YEAR      EXPENSE      RECOVERIES)      ADJUSTMENTS)    OF YEAR
             -----------               ----------    --------    --------------    ------------    -------
<S>                                    <C>           <C>         <C>               <C>             <C>
Allowance for doubtful accounts:
  1996...............................    $  187         316            (2)                6        $  495
  1997...............................    $  495         817             5               173        $1,144
  1998...............................    $1,144       1,752            --               159        $2,737
</TABLE>
 
<TABLE>
<CAPTION>
                                                    CHARGED       CHARGED TO
                                      BALANCE AT    TO COSTS    OTHER ACCOUNTS      DEDUCTIONS      BALANCE
                                      BEGINNING       AND        (TRANSLATION     (WRITE-OFFS OF    AT END
            DESCRIPTION                OF YEAR      EXPENSE      ADJUSTMENTS)       INVENTORY)      OF YEAR
            -----------               ----------    --------    --------------    --------------    -------
<S>                                   <C>           <C>         <C>               <C>               <C>
Inventory obsolescence:
  1996..............................    $  352       1,804            --              1,097         $1,059
  1997..............................    $1,059       1,652           (18)             1,545         $1,148
  1998..............................    $1,148       1,148             5                882         $1,419
</TABLE>
 
                                       S-2