<PAGE>   1


                                    FORM 10-Q

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

(Mark One)
(X)    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 
       EXCHANGE ACT OF 1934

                  For the quarterly period ended March 28, 1998
                                                 --------------

                                       OR

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

        For the transition period from_______________to_________________

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

                      Commission file number       0-10734
                                            --------------------

                            FERROFLUIDICS CORPORATION
             ------------------------------------------------------
             (Exact name of registrant as specified in its charter)

      Massachusetts                                              02-0275185
      ----------------------------------------          -------------------
      (State or other jurisdiction of                       (I.R.S.Employer
      incorporation or organization                     Identification No.)

      40 Simon Street,
      Nashua, New Hampshire                                           03061
      ----------------------------------------          -------------------
      (Address of principal executive offices)                   (Zip Code)

      (Registrant's telephone number, including area code)  (603) 883-9800
                                                            --------------


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

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

                               (1) Yes X   No
                                      ---    ---
                               (2) Yes X   No
                                      ---    ---

Indicate the number of shares outstanding of each of the Registrant's classes of
Common Stock, as of April 30, 1998.

Common Stock, $.004 par value per share                           6,218,303
---------------------------------------                        ---------------
(Class)                                                        (No. of Shares)


<PAGE>   2



                                TABLE OF CONTENTS

                                                                    Page Nos.
                                                                    ---------

Part I.  Financial Information

Item 1.  Financial Statements

             Consolidated Balance Sheets -
             March 28, 1998 and June 28, 1997                              3

             Consolidated Statements of Operations -
             Three Months Ended March 28, 1998 and March 29, 1997          4

             Consolidated Statements of Operations -
             Nine Months Ended March 28, 1998 and March 29, 1997           5

             Consolidated Statements of Cash Flows -
             Nine months Ended March 28, 1998 and March 29, 1997           6

             Notes to Consolidated Financial Statements                7 - 9


Item 2.  Management's Discussion and Analysis of Results of 
         Operations and Financial Position                            9 - 14


Part II. Other Information                                                14

Signatures                                                                15







                                       2
<PAGE>   3


PART I.FINANCIAL INFORMATION

ITEM 1.

                            FERROFLUIDICS CORPORATION
                           CONSOLIDATED BALANCE SHEETS
                        March 28, 1998 and June 28, 1997

<TABLE>
<CAPTION>
ASSETS                                                                March 28, 1998          June 28, 1997
------                                                                --------------          -------------
Current Assets:                                                         (unaudited)               (note)
<S>                                                                    <C>                     <C>        
  Cash and cash equivalents                                            $  1,355,000            $   883,000
  Accounts receivable - trade, less allowance
  for doubtful accounts of $231,000 at
  March 28, 1998 and $199,000 at June 28, 1997                           13,772,000             13,609,000
  Inventories                                                            13,059,000             15,263,000
  Advances to suppliers                                                     889,000              1,341,000
  Prepaid and other current assets                                          503,000                474,000
                                                                       ------------            -----------
Total Current Assets                                                     29,578,000             31,570,000
                                                                       ------------            -----------
Property, plant and equipment, at cost, net
  of accumulated depreciation of $11,923,000 at
  March 28, 1998 and $10,961,000 at June 28, 1997                         9,566,000              8,377,000
Cash value of life insurance                                              1,872,000              1,751,000
Deferred income taxes, net                                                3,301,000              1,815,000
Other assets, principally goodwill                                        1,129,000              1,488,000
                                                                       ------------            -----------
TOTAL ASSETS                                                           $ 45,446,000            $45,001,000
                                                                       ============            ===========

LIABILITIES
-----------
Current Liabilities:
  Bank notes payable                                                     10,064,000              6,781,000
  Accounts payable                                                        3,196,000              5,126,000
  Customer deposits                                                       1,102,000              2,426,000
  Accrued expenses                                                        5,168,000              3,914,000
                                                                       ------------            -----------
Total Current Liabilities                                                19,530,000             18,247,000
                                                                       ------------            -----------

Long-term debt obligations                                                5,000,000              5,000,000
Other liabilities                                                           460,000                173,000

STOCKHOLDERS' EQUITY
--------------------
Preferred stock, $.001 par value, authorized
  100,000 shares, issued and outstanding, none                                    -                      -
Common stock, $.004 par value, authorized
  12,500,000 shares, issued and outstanding 6,215,539 shares
  at March 28, 1998 and 6,178,262 at June 28, 1997                           25,000                 25,000
Additional paid-in capital                                               36,719,000             36,477,000
Retained deficit                                                        (15,146,000)
Currency translation adjustments                                         (1,142,000)              (950,000)
                                                                       ------------            -----------
Total Stockholders' Equity                                               20,456,000             21,581,000
                                                                       ------------            -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                             $ 45,446,000            $45,001,000
                                                                       ============            ===========
</TABLE>

Note: The balance sheet at June 28, 1997 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.

The accompanying notes are an integral part of the consolidated financial
statements


                                       3




<PAGE>   4


                            FERROFLUIDICS CORPORATION
                  CONSOLIDATED STATEMENTS OF OPERATIONS For the
              Three Months Ended March 28, 1998 and March 29, 1997
                                   (unaudited)

<TABLE>
<CAPTION>
                                                                        1998               1997
                                                                 -----------        -----------

<S>                                                              <C>                <C>        
Net sales and revenues                                           $11,745,000        $17,252,000
Cost of goods sold                                                 9,774,000         12,011,000
                                                                 -----------        -----------
                                                                   1,971,000          5,241,000

Engineering and product development expenses                       1,178,000          1,245,000
Selling, general and administrative expense                        2,748,000          3,199,000
Restructuring expenses                                               721,000                  -
Provision for impairment of asset values                           1,006,000                  -
                                                                 -----------        -----------
Income (loss) from operations                                     (3,682,000)           797,000

Interest income                                                        6,000              6,000
Interest (expense)                                                  (256,000)          (217,000)
Other income (expense)                                                10,000           (266,000)
                                                                 -----------        -----------

Income (loss) - before income taxes                               (3,922,000)           320,000
Provision (benefit) - before income taxes                         (1,480,000)            36,000
                                                                 -----------        -----------

Net income (loss)                                                $(2,442,000)       $   284,000
                                                                 ===========        ===========

Per Share Data:
---------------

Net income (loss) - per common share                             $      (.39)       $       .05
                                                                 ===========        ===========

Net income (loss) - per common share - assuming dilution         $      (.39)       $       .05
                                                                 ===========        ===========
</TABLE>







The accompanying notes are an integral part of the consolidated financial
statements.


                                       4
<PAGE>   5


                            FERROFLUIDICS CORPORATION
                  CONSOLIDATED STATEMENTS OF OPERATIONS For the
               Nine months Ended March 28, 1998 and March 29, 1997
                                   (unaudited)

<TABLE>
<CAPTION>
                                                                        1998                 1997
                                                                 -----------          -----------

<S>                                                              <C>                  <C>        
Net sales and revenues                                           $42,509,000          $50,320,000
Cost of goods sold                                                31,060,000           34,704,000
                                                                 -----------          -----------
                                                                  11,449,000           15,616,000

Engineering and product development expenses                       3,270,000            4,031,000
Selling, general and administrative expense                        8,066,000            9,552,000
Restructuring Expense                                                721,000                    -
Provision for impairment of asset values                           1,006,000                    -
                                                                 -----------          -----------
Income (loss) from operations                                     (1,614,000)           2,033,000

Interest income                                                       16,000               37,000
Interest (expense)                                                  (794,000)            (579,000)
Other (expense)                                                      (92,000)            (279,000)
                                                                 -----------          -----------

Income (loss) before income taxes                                 (2,484,000)           1,212,000
Provision (benefit) for income taxes                              (1,309,000)             137,000
                                                                 -----------          -----------

Net income (loss)                                                $(1,175,000)         $ 1,075,000
                                                                 ===========          ===========

Per Share Data:
---------------
Net income (loss) per common share                               $      (.19)         $      0.18
                                                                 ===========          ===========

Net income (loss) per common share - assuming dilution           $      (.19)         $      0.17
                                                                 ===========          ===========
</TABLE>








The accompanying notes are an integral part of the consolidated financial
statements.

 
                                        5
<PAGE>   6


                            FERROFLUIDICS CORPORATION
               CONSOLIDATED STATEMENTS OF CASH FLOWS For the Nine
                 Months Ended March 28, 1998 and March 29, 1997
                                   (unaudited)

                                                            1998           1997
                                                     -----------    -----------
Cash flows from operating activities:
  Net income                                         $(1,175,000)   $ 1,075,000
  Adjustments to reconcile net income to net
  cash used in operations:
    Depreciation and amortization                      1,304,000      1,219,000
    Provision for impairment of asset values           1,006,000              -
    Deferred income taxes (credits)                   (1,486,000)             -
    Restricted stock expense                             283,000        381,000
    Other                                               (227,000)      (122,000)
    Changes in assets and liabilities:
     Accounts receivable                                (282,000)    (1,931,000)
     Inventories                                       2,120,000     (1,462,000)
     Prepaid expenses and other current assets           421,000        161,000
     Accounts payable and accrued expenses              (387,000)    (1,785,000)
     Customer deposits                                (1,324,000)     1,172,000
                                                     -----------    -----------
    Net cash used in operating activities                253,000     (1,291,000)
                                                     -----------    -----------

Cash flow from investing activities:
  Additions to property, plant, equipment             (3,237,000)    (1,006,000)
  Proceeds from sale of assets                                 -         38,000
  Restricted cash and other                               90,000              -
                                                     -----------    -----------
  Net cash used in investing activities               (3,147,000)      (968,000)
                                                     -----------    -----------

Cash flow from financing activities:
  Proceeds from issuance of common stock                       -        156,000
  Short term borrowing, net                            3,538,000      2,167,000
  Payments on installment debt obligations              (111,000)      (101,000)
                                                     -----------    -----------
  Net cash provided by financing activities            3,427,000      2,222,000
                                                     -----------    -----------

Effect of currency rate changes on cash                  (61,000)      (107,000)
                                                     -----------    -----------

Net increase (decrease) in cash                          472,000       (144,000)
                                                     -----------    -----------
Cash and cash equivalents at beginning of period         883,000      1,701,000
                                                     -----------    -----------

Cash and cash equivalents at end of period           $ 1,355,000    $ 1,557,000
                                                     ===========    ===========

Cash paid for interest and income taxes for the nine months ended March 28, 1998
and March 29, 1997 is as follows:

                                                            1998           1997
                                                        --------       --------
         Interest                                       $776,000       $582,000
         Income taxes                                   $  5,000       $416,000


The accompanying notes are an integral part of the consolidated financial
statements.

                                       6
<PAGE>   7


                            FERROFLUIDICS CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

   A.  BASIS OF PRESENTATION

       The accompanying consolidated financial statements of Ferrofluidics
   Corporation and its subsidiaries (the "Company") have been prepared in
   accordance with generally accepted accounting principles for interim
   financial information and in accordance with the instructions to Form 10-Q
   and Rule 10-01 of Regulation S-X. They do not therefore include all of the
   information and footnotes required by generally accepted accounting
   principles for complete financial statements. In the opinion of management,
   all adjustments (consisting of normal recurring accruals) considered
   necessary for a fair presentation have been included. The results of
   operations of any interim period are subject to year-end adjustments, and are
   not necessarily indicative of the results of operations for the fiscal year.
   For further information, refer to the consolidated financial statements and
   the footnotes thereto included in the Company's Annual Report on Form 10-K
   for the year ended June 28, 1997 ("fiscal 1997").

   FOREIGN EXCHANGE CONTRACTS

       At March 28, 1998, the Company had outstanding approximately $2.3 million
   in foreign exchange contracts used to hedge against fluctuations in the
   translation of the balance sheets of foreign subsidiaries. These contracts
   were marked to market at March 28, 1998. Separately, the Company had
   outstanding at March 28, 1998 two additional contracts to sell forward, for
   periods up to three months, approximately $1.8 million in anticipated foreign
   currency receipts in connection with a contract for the sale of crystal
   growing systems. No gain or loss has been recognized on these contracts as of
   March 28, 1998.

   USE OF ESTIMATES

       The preparation of the financial statements in conformity with generally
   accepted accounting principles requires management to make estimates and
   assumptions that affect the amounts reported in the financial statements and
   accompanying notes. Actual results could differ from those estimates.

   B.  INVENTORIES

       Inventories are stated at the lower of cost (first-in, first-out) or
   market. Inventories are as follows at March 28, 1998
   and June 28, 1997:

                                               March 28, 1998     June 28, 1997
                                               --------------     -------------

        Raw materials and purchased parts         $ 6,726,000         8,082,000
        Work-in-process                             2,761,000         2,962,000
        Finished goods                              3,572,000         4,219,000
                                                  -----------       -----------
        Total inventories                         $13,059,000       $15,263,000
                                                  ===========       ===========


   C.  INCOME TAXES

       FASB Statement No. 109, Accounting for Income Taxes, requires a valuation
   allowance against deferred tax assets if it is more likely than not that some
   or all of the deferred tax assets will not be realized. Due to the
   uncertainty surrounding the Company's ability to realize the benefit of the
   entire deferred tax asset, a valuation allowance in the amount of $12,027,000
   had been established at June 28, 1997. Based upon a current assessment of the
   future earnings prospects for the Company through fiscal 1999 after the
   restructuring and other expenses recorded in the quarter ended March 28,
   1998, and the overall outlook for revenue levels in all of the Company's
   product lines, management has concluded that it is more likely than not that
   the Company will be sufficiently profitable to utilize the additional
   deferred tax asset resulting from the operating losses in the current
   quarter.


                                       7




<PAGE>   8

       As of March 28, 1998, the Company had remaining net operating loss
   carryforwards for Federal income tax purposes of approximately $27,600,000,
   and for foreign income tax purposes of approximately $5,073,000, which can be
   used to offset future taxable income. The net operating loss carryforwards
   for Federal income tax purposes will expire at various dates through 2010.
   Included in the loss carryforward, for income tax purposes, is approximately
   $16,800,000 of tax deductions resulting from the excess of the market price
   over the exercise price on the date of exercise of the Company's stock
   options and warrants which were exercised during 1993 and prior years. The
   tax benefit to be realized upon utilization of the $16,800,000 of loss
   carryforwards will result in a decrease in current income taxes payable and
   an increase to additional paid-in capital.

   D.  EARNINGS PER SHARE

       In February 1997, the Financial Accounting Standards Board issued
   Statement No. 128, Earnings Per Share ("Statement 128"), which is required to
   be adopted for financial statements issued for periods ending after December
   15, 1997, including interim periods. Accordingly, the Company has adopted
   Statement 128 as of December 27, 1998 and has changed the method previously
   used to compute earnings per share. Under the requirements of Statement 128
   for calculating basic earnings per share, the dilutive effect of stock
   options, warrants and other common stock equivalents is excluded. Statement
   128 also requires that fully diluted earnings per share be reported, and that
   all prior periods be restated.

       The following table sets forth the computation of basic and diluted
   earnings per share:

<TABLE>
<CAPTION>
                                                           Three months ended                    Nine months ended
                                                      -----------------------------        ------------------------------
                                                        3/28/98            3/29/97           3/28/98            3/29/97
                                                      -----------        ----------        -----------        -----------
   <S>                                                <C>                <C>               <C>                <C>       
   Numerator:
       Net Income                                     $(2,442,000)       $  284,000        $(1,175,000)       $1,075,000

   Denominator:
       Denominator for basic earnings per
         share - weighted average shares                6,208,941         6,094,625          6,192,696         6,080,172

       Effect of dilutive securities:
         Employee stock options                                 -             4,857                  -            32,101
         Non-vested restricted stock                            -            50,314                  -            58,460
                                                      -----------        ----------        -----------        ----------
       Dilutive potential common shares                         -            55,171                  -            90,561

       Denominator for diluted earnings per
         share - adjusted weighted average
         shares and assumed conversions                 6,208,941         6,149,709          6,192,696         6,170,733
                                                      ===========        ==========        ===========        ==========

   Net income per common share                        $      (.39)       $      .05        $      (.19)       $      .18
                                                      ===========        ==========        ===========        ==========

   Net income pr common share - assuming dilution     $      (.39)       $      .05        $      (.19)       $      .17
                                                      ===========        ==========        ===========        ==========
</TABLE>


   E. RESTRUCTURING AND OTHER CHARGES

       During the quarter ended March 28, 1998, the Company recorded
   restructuring and other charges totaling $3,663,000, which, after an income
   tax benefit of $1,306,000, reduced net income by $2,357,000, or $.38 per
   share. The charges were principally the result of a detailed review of the
   crystal growing systems business undertaken by the Company in the current
   quarter, which concluded that existing backlog and prospective new business
   is not likely to be sufficient to support the existing structure of the
   division. These charges include restructuring expenses of $721,000 which is
   principally severance pay. Other charges, totaling $1,747,000 were made to
   cost of goods sold, and include the establishment of inventory reserves and
   other inventory 




                                       8


<PAGE>   9

   adjustments, an anticipated claim for canceling open orders for inventory,
   and charges for anticipated costs to complete certain field installations. In
   addition, an amount totaling $1,006,000 for writedown of certain fixed assets
   to reflect current estimates of recoverability of value was charged to
   income. For a more detailed discussion, see Item 2 - Results of Operations.

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

       The following discussion provides information to assist in the
   understanding of the Company's results of operations and financial condition.
   It should be read in conjunction with the consolidated financial statements
   and notes thereto that appear elsewhere herein.

   RESULTS OF OPERATIONS

   THREE MONTHS ENDED MARCH 28, 1998 AND MARCH 29, 1997:
       In the quarter ended March 28, 1998, the Company recorded a net loss of
   $2,442,000 or $.39 per share, (basic and diluted), as compared to net income
   in the same period of fiscal 1997 of $284,000, or $.05 per share (basic and
   diluted). The decline in net income was due to a combination of reduced
   revenues in the Company's crystal growing systems business and increased
   expenses in the current quarter due to the provision of $3,663,000 in
   restructuring and other charges as a result of the decline in demand for
   crystal growing equipment and the consequent decision to downsize this
   division in response to that decline.

       Net sales and revenues for the quarter ended March 28, 1998 totaled
   $11,745,000 as compared to $17,252,000 in the same period of the prior year.
   A comparison of the net sales and revenues by major product line is as
   follows:

                                               Three months ended
                                         --------------------------------
                                         March 28, 1998    March 29, 1997
                                         --------------    --------------

          Crystal growing systems          $ 4,249,000       $11,142,000
          Seals                              4,226,000         3,797,000
          Fluids                               545,000           600,000
          Distributed products               2,725,000         1,713,000
                                           -----------       -----------
            Total net sales and revenues   $11,745,000       $17,252,000
                                           ===========       ===========

       Of the revenues in the quarter ended March 28, 1998, approximately
   $1,680,000, or 14%, represented sales to one affiliated group of companies,
   as compared to approximately $4,500,000, or 26% in the same quarter of the
   previous year. This is the result of reductions in scheduled deliveries to
   this customer.

       Third quarter revenues in the Systems Division declined 61% from the
   $11,142,000 recorded in the same quarter of the previous fiscal year. This
   was a result of the decline in demand for crystal growing systems that has
   taken place in the last several months. In addition, shipment of two machines
   scheduled for this quarter was delayed into the fourth quarter as a result of
   customer requirements. These developments led the Company to conduct a
   detailed review of its participation in the crystal growing business, which
   resulted in the decision to substantially reduce the commitment of resources
   to this business as is described later.

       Consolidated gross margins for the third quarter of fiscal 1998 amounted
   to 16.8% of product sales as compared to 30.4% of product sales in the prior
   year's third quarter. This decline in gross margin is principally a result of
   the decision to downsize the crystal growing systems business and the
   consequent writeoffs and charges to expense, as well as to a provision for
   the estimated costs to complete certain field installations. Total charges to
   cost of goods sold for these purposes were $1,747,000, or 14.9% of product
   sales for the quarter. Partly offsetting this reduction in margin was the
   improved mix of sales due to the higher proportion of components and
   distributed products in the mix of business sold. These product lines carry
   higher gross margins than the systems business.

                                       9




<PAGE>   10

       Consolidated order bookings for the three months ended March 28, 1998
   totaled $9,215,000 as compared to $14,271,000 in the same period of the prior
   year. This was primarily the result of a decline in bookings for crystal
   growing systems, which decreased from $6,954,000 in the third quarter of
   fiscal 1997 to $2,081,000 in the current quarter. Bookings for the Company's
   other proprietary products of $3,981,000 in the third quarter of fiscal 1998 
   represented a decrease of 28% from the $5,544,000 achieved in the third
   quarter of fiscal 1997, which reflected the effects of Asia's financial
   problems on certain customers and an increasing trend amongst semiconductor
   companies toward fewer long term booking commitments. Bookings for the third
   quarter for distributed products by the Company's European subsidiary ("AP &
   T") increased 78% to $3,154,000 as compared to $1,773,000 in the same quarter
   of fiscal 1997. This was the result of the improved economic activity in
   Europe, and increased orders for certain of the power supply products
   distributed in England and Europe by AP&T.

       Consolidated backlog at March 28, 1998 was $24,246,000 compared to
   $37,483,000 at June 28, 1997. The decrease is primarily due to the decrease
   in backlog for the Company's crystal growing systems, which at March 28, 1998
   totaled $16,789,000 as compared to $30,276,000 at June 28, 1997. Included in
   order backlog is an amount of $10,080,000 on an order from the Company's
   largest customer for which no delivery schedule has been established. The
   rest of the Company's backlog of systems is expected to ship in the current
   fiscal year and in the first quarter of fiscal 1999. During the third quarter
   of this fiscal year, the Company received a letter of intent from a customer
   to place an order of approximately $9,000,000, but late in the quarter, the
   customer indicated that the actual order would be scaled back substantially
   to approximately $5,400,000. Backlog for crystal growing systems decreased as
   a result of the decreased order activity in the business in general, and
   continued shipment of product from backlog previously sold. The backlog of
   orders for components products, including fluids, declined from $4,787,000 at
   June 28, 1997 to $3,473,000 at March 28, 1998 and the backlog for distributed
   products increased from $2,420,000 at June 28, 1997 to $3,984,000 at March
   28, 1998.

       Engineering and product development expenditures in the three months
   ended March 28, 1998 totaled $1,178,000, a decrease of $67,000, or 5%,
   compared to $1,245,000 in the same period last year. As a percentage of
   revenues, net engineering and product development expenses increased from
   7.2% in the March 1997 quarter to 10.0% in the current quarter. This increase
   was primarily the result of continued spending on sustaining engineering
   projects and product development efforts in the components and fluids
   business, and certain remaining engineering efforts in the systems business.

       Selling, general and administrative expenses (SG&A) for the three months
   ended March 28, 1998 totaled $2,748,000, a decrease of 14.1% from the SG&A of
   $3,199,000 in the same period of the prior year. The decrease is due
   primarily to the reduction in corporate staffing undertaken in April 1997 as
   well as to a reduction in restricted stock vesting and legal costs.

       Interest expense of $256,000 for the three months ended March 28, 1998
   represented an increase of $39,000 over that in the same period in fiscal
   1997 due principally to higher borrowings under the Company's credit facility
   made available by its bank.

       As a result of the decline in demand for products of the Company's
   crystal growing systems business that has taken place in recent months, a
   detailed review of this business was undertaken in the third quarter of
   fiscal 1998. The conclusion of this study was that the Company's commitment
   of resources to the business was greater than could be justified by the
   prospects for new sales in this product line, and the Company determined that
   this commitment of resources should be reduced and redirected toward the
   components and fluids businesses, where management believes the prospects for
   future growth appear to be better. The Company therefore concluded that a
   substantial downsizing of its systems division was warranted, and developed
   and implemented a plan to reduce the size of the division. Included in this
   plan was the decision to reduce the overall staffing of the division from
   close to 100 employees to approximately 35, and to review all assets devoted
   to the business. As a result of this review, the Company recorded a
   restructuring charge of $721,000 for employee severance expenses and certain
   consulting fees related to the restructuring. It was also concluded that the
   full recovery of the carrying value of certain fixed assets devoted to the
   systems business had become unlikely, and a provision for impairment of
   $1,006,000 was charged to expense. In addition, the Company charged to cost
   of goods sold purchase contract cancellation charges and reserves against the
   systems business inventories (which may have 


                                       10



<PAGE>   11
   had their value impaired by this decision) totaling $1,747,000. The Company
   estimates that the restructuring plan and other charges and writedowns will
   reduce future annual employment and other costs by approximately $2,400,000.

       The operating loss for the quarter that was the result of these decisions
   has increased the deferred tax asset on the Company's books by $1,486,000.
   Based upon a current assessment of the future earnings prospects for the
   Company through fiscal 1999 after the restructuring and other expenses
   described in the preceding paragraph and on the overall outlook for revenue
   levels in all of the Company's product lines, the Company has concluded that
   it is more likely than not that the Company will be sufficiently profitable
   to utilize the additional deferred tax asset resulting from the operating
   losses in the current quarter. See Note C to the financial statements.

       As of March 28, 1998, the Company had remaining net operating loss
   carryforwards for Federal income tax purposes of approximately $27,600,000,
   and for foreign income tax purposes of approximately $5,073,000, which can be
   used to offset future taxable income. The net operating loss carryforwards
   for Federal income tax purposes will expire at various dates through 2010.
   Included in the loss carryforward, for income tax purposes, is approximately
   $16,800,000 of tax deductions resulting from the excess of the market price
   over the exercise price on the date of exercise of the Company's stock
   purchase options and warrants which were exercised during 1993 and prior
   years. The tax benefit to be realized upon utilization of the $16,800,000 of
   loss carryforwards will result in a decrease in current income taxes payable
   and an increase to additional paid-in capital at the time such benefits are
   realized. The tax provision for the three months ended March 28, 1998
   includes a provision for certain state alternative minimum and foreign income
   taxes.

   NINE  MONTHS ENDED MARCH 28, 1998 AND MARCH 29, 1997:
       In the nine months ended March 28, 1998, the Company had a net loss of
   $1,175,000, or $.19 per share (basic and diluted), as compared to net income
   in the same period of fiscal 1997 of $1,075,000, or $.18 per share basic and
   $.17 per share diluted. The decline in net income is a result of the
   restructuring expenses and other costs incurred in the current quarter in
   connection with the downsizing of the Company's crystal growing systems
   business. See Note E to the financial statements.

       Net sales and revenues for the nine months ended March 28, 1998 declined
   to $42,509,000 as compared to $50,320,000 in the same period of the prior
   year. A product line comparison of the net sales and revenues, for the nine
   months ended March 28, 1998 and March 29, 1997 is as follows:

                                                  1998           1997
                                           -----------    -----------
       Crystal growing systems             $20,821,000    $32,334,000
       Seals                                12,931,000      9,870,000
       Fluids                                1,676,000      1,853,000
       Distributed products                  7,081,000      6,263,000
                                           -----------    -----------
         Total net sales and revenues      $42,509,000    $50,320,000
                                           ===========    ===========

       Of the revenues in the first nine months of fiscal 1998 and fiscal 1997,
   approximately $7,000,000 (16%) and $21,600,000 (43%), respectively,
   represented sales to one affiliated group of companies. This decline is the
   result of reductions in the scheduled deliveries to this customer.
     
       Revenues in the Systems Division for the nine months ended March 28, 1998
   declined to $20,821,000 from the $32,334,000 recorded in the same period of
   the previous fiscal year. A substantial part of this decline took place in
   the third quarter of the current fiscal year due to the decline in industry
   demand for crystal growing systems and the delay in shipment of two machines
   into the fourth quarter of fiscal 1998. Reduced deliveries in prior months to
   the Company's principal customer for crystal growing systems contributed to
   the rest of the decline.

       Consolidated gross margins for the nine months ended March 28, 1998
   amounted to 26.9% of product sales as compared to 31.0% of product sales in
   the same period of the prior year. The decline in gross margin in the current
   year is due to the charges to cost of goods sold made in the current quarter
   as a result of the decision described above to undertake the restructuring
   and downsizing of the crystal growing systems business. These charges
   included accruals for 

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<PAGE>   12
   anticipated expenses in connection with the cancellation of purchase orders
   for inventory, and establishment of inventory reserves. See also Note E to
   the financial statements.

       Consolidated order bookings for the nine Months ended March 28, 1998
   totaled $29,158,000 as compared to $41,741,000 in the same period of the
   prior year. Of the current year's bookings, $7,600,000 represent orders for
   silicon crystal growing systems as compared to $22,990,000 in the previous
   period. Bookings for the remaining product lines increased 15% from
   $18,759,000 in the prior period to $21,558,000 in the first nine months of
   the current year.

       Engineering and product development expenditures in the nine months ended
   March 28, 1998 totaled $3,270,000 a decrease of $761,000 or 19% compared to
   $4,031,000 in the same period last year. As a percentage of revenues, net
   engineering and product development expenses decreased from 8.0% in the nine
   months ended March 29, 1997 quarter to 7.7% in the nine months ended March
   28, 1998. This decrease was primarily because spending on sustaining
   engineering projects and project development efforts in systems business were
   at high levels in the previous fiscal year as several new crystal growing
   systems were being designed and built.

       Interest expense of $794,000 for the nine months ended march 28, 1998
   represented an increase of $215,000 over that in the same period in fiscal
   1997 due to higher borrowings under the Company's credit facility made
   available by its bank.

       Selling, general and administrative expenses for the nine months ended
   March 28, 1998 totaled $8,066,000, a decrease of 16% from the $9,552,000
   recorded in the nine months ended March 29, 1997. This decrease was due to
   reduced staffing and related expenses initiated in April 1997, reduced
   charges for restricted stock expense, and reduced legal costs.

   LIQUIDITY AND CAPITAL RESOURCES

       Net working capital at March 28, 1998 was $10,048,000 as compared to
   $13,323,000 at June 28, 1997. The current assets of the Company decreased
   during the first nine months of fiscal 1998 due primarily to a decrease in
   inventories. The decrease in inventory was principally due to the reduction
   in inventory values recorded in connection with the downsizing of the systems
   business (see Note E to the financial statements). A reduction in advances to
   suppliers was offset by an increase in cash and other current assets. Current
   liabilities, however, increased during the first nine months of fiscal 1998
   as a result of additional short term borrowings against the Company's
   revolving line of credit, and because of an increase in accrued expenses
   related to the downsizing of the systems business. Although there was a
   significant decrease in accounts payable and customer deposits, total current
   liabilities increased during the period which was a factor in the decrease in
   net working capital.

       During the nine months ended March 28, 1998, the operations of the
   business provided cash from operations of $253,000, as non-cash charges to
   income, and a decrease in inventories was largely offset by decreases in
   accounts payable, customer deposits, and an increase in deferred taxes. At
   March 28, 1998, the Company had outstanding purchase commitments for material
   of approximately $9,000,000 representing long lead-time items and other
   component parts for the Company's crystal growing system business.

       Investing activities during the nine months ended March 28, 1998 included
   the collection of $90,000 from a restricted cash deposit, and $3,237,000 of
   investment in property plant and equipment. Of the latter amount,
   approximately $762,000 represented acquisitions of general property, plant
   and equipment. The remainder was an investment of approximately $2,475,000 in
   the construction of a 300mm crystal growing system which it intends to
   operate as part of a demonstration facility in its manufacturing plant for
   display to prospective customers as well as for the production of 300mm
   silicon ingots for sale. In connection with the decision to downsize the
   systems business, it was concluded that the overall uncertainties in the
   outlook for the business introduced doubt as to the recoverability of the
   full value of the 300mm machine, and the Company decided to write down its
   value to an amount which, in management's judgment, represents recoverable
   value. This charge was included as an asset impairment loss in the third
   quarter of fiscal 1998. At March 28, 1998, the Company did not have any
   material purchase commitments with respect to property and equipment.
   Financing activities of the Company during the nine months ended March 28,
   1998 



                                       12


<PAGE>   13
   were comprised entirely of increases in net borrowings of $3,427,000
   from its bank credit facilities (described below). The consolidated results
   of operations for the nine months ended March 28, 1998 includes a non-cash
   charge of $267,000 for compensation to employees as a result of restricted
   stock grants made in prior years. In the same period last year, a charge of
   $391,000 was made for the same purpose.

       The restructuring and other charges to expense made in the third quarter
   of fiscal 1998 include approximately $1,347,000 in accruals for future
   expenses which will become cash outlays during the next six to nine months.
   The majority of this amount represents employee severance expense which will
   actually be paid as the business restructuring plan for the systems business
   is implemented in stages over the next three quarters, and in accruals for
   expenses relating to certain field installations, which also will be incurred
   over the next three quarters. The fixed asset writedowns will reduce
   depreciation expense in future years, and the remaining charges are all
   non-cash adjustments in carrying value of assets. The Company intends to
   vigorously pursue selling these assets, which, if successful, would result in
   cash inflows to the Company.

       Under an arrangement with its bank, the Company has available to it a
   total credit facility of approximately $14,400,000, which includes
   approximately $5,400,000 in the form of a stand-by letter of credit for the
   Company's $5,000,000 1984 Series Industrial Revenue Bonds, an $8,500,000
   revolving line-of-credit for working capital purposes, and $500,000
   representing the remaining balance of an installment payment note used to
   finance the expansion of its in-house machine shop. In addition, in October
   1997, the Company entered into an agreement with its bank under which the
   bank advanced to the Company $1,500,000 in the form of a 90-day promissory
   note in order to cover anticipated short term financing needs. This note
   bears interest at the same rate as the revolving credit line, and remained
   outstanding at March 28, 1998. The entire credit facility is collateralized
   by substantially all of the assets of the Company. As of March 28, 1998, the
   entire $8,500,000 was outstanding against the revolving line-of-credit. The
   interest rate on the revolving line-of-credit was 9.5% at March 28, 1998.
   This credit arrangement currently expires on May 31, 1998, and the Company is
   actively discussing with the bank the renewal of the credit line. Although
   management expects that the credit line will be renewed, there is no
   assurance that it will be renewed.

       With its current banking agreement and the Company's anticipated
   operating cash flow, the Company believes it has sufficient working capital
   resources to fund its operations through fiscal 1998 and into fiscal 1999.
   Early in the third quarter of fiscal 1998, the Company announced that it had
   withdrawn from the competition to supply a 300mm crystal growing system to
   its major customer for evaluation purposes. This has led to substantially
   reduced capital expenditure requirements, and the Company now believes that
   these requirements can be met out of current working capital and banking
   relationships. In addition, the Company continues to obtain contractual
   advance payments from customers in its systems business in order to assist in
   the financing of that business.

   YEAR 2000 ISSUE

       The Company has undertaken an assessment of its vulnerability to the
   so-called "Year 2000 issue" with respect to its computer systems. The Company
   has in recent years relied almost entirely on purchased off-the-shelf
   software packages for both business and engineering purposes, and has not
   materially customized these packages for its purposes. These software
   packages run on a personal computer based local area network which was
   installed in 1993, and which has been upgraded as needed since then. The
   assessment was based upon formal and informal communications with the
   software vendors, literature supplied with the software, literature received
   in connection with maintenance contracts, and test evaluations of the
   software.

       As a result of the assessment the Company believes that all of its major
   business systems software is year 2000 compliant and that the year 2000 issue
   is not likely to have a material impact on the Company's operations.
   Nevertheless, a project to further verify year 2000 compliance in the
   Company's systems has been undertaken and is expected to be completed by the
   end of fiscal 1998. This project will be completed with the Company's
   existing resources, and is not expected to have a material effect on the
   Company's financial results. 

       This report contains forward-looking statements within the meaning of
   Section 27A of the Securities Act of 1933 and Section 21E of the Securities
   Exchange Act of 1934. There are certain factors that could cause actual




                                       13
<PAGE>   14
   results to differ materially from those anticipated by the statements made
   above. These include, but are not limited to, cancellation of letters of
   intent, further rescheduling of existing crystal puller orders, additional
   crystal puller orders from existing or new customers, including those
   mentioned above, lack of new crystal puller orders from existing or new
   customers, change in revenues in the Company's other business, and material
   changes in the market conditions within the semiconductor industry, failure
   to obtain renewal of the credit line, and inability to utilize deferred tax
   credits.  For additional information concerning these and other important
   factors which may cause the Company's actual results to differ materially
   from expectations and underlying assumptions, please refer to the reports
   filed by the Company with the Securities and Exchange Commission.


   PART II.  OTHER INFORMATION

   ITEM B. EXHIBITS AND REPORTS ON FORM 8-K

        (a) Exhibits:

            27 - Financial Data Schedule

        (b) Reports on Form 8-K:

            None.



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<PAGE>   15

                                   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.


                                         FERROFLUIDICS CORPORATION
                                         -------------------------
                                         (Registrant)




   Date: May 12, 1998                    By: /s/ Salvatore J. Vinciguerra
         ------------                        ---------------------------------
                                         Salvatore J. Vinciguerra
                                         President and Chief Executive Officer

                                         By: /s/ William B. Ford
                                             ---------------------------------
                                         William B. Ford
                                         Vice President Finance




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