<PAGE>
 
================================================================================

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

                                   FORM 10-K

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

    FOR THE FISCAL YEAR ENDED:  May 31, 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:  0-10095



                            UNIT INSTRUMENTS, INC.
            (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
                                        
                 CALIFORNIA                        33-0077406
        (STATE OR OTHER JURISDICTION             (I.R.S. EMPLOYER
              OF INCORPORATION)               IDENTIFICATION NUMBER)
                                        



           22600 SAVI RANCH PARKWAY, YORBA LINDA, CALIFORNIA  92887
             (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
                                        


      REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (714) 921-2640
                                        

                                        
================================================================================
<PAGE>
 
  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   XXX       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]


  On August 3, 1998, 3,867,814 shares of the Corporation's Common Stock,
$.15 par value, were held by non-affiliates. The aggregate market value of such
shares, computed by reference to the closing price of the Corporation's Common
Stock on Nasdaq on August 3, 1998 was $37,228,000.


  Indicate the number of shares outstanding of each of the issuer's
classes of Common Stock, as of the latest practicable date.


                          CLASSES               OUTSTANDING AT AUGUST 3, 1998:
         ---------------------------------      ------------------------------
         Common Stock $.15 Par Value.......                3,995,118

                                       2
<PAGE>
 
                                    PART  I
                                        
ITEM 1.  BUSINESS

GENERAL
-------

  Unit Instruments, Inc. ("Unit"), a California corporation, was
incorporated in 1984 and is the successor-in-interest to Autoclave Engineers,
Inc. ("Autoclave"), a Pennsylvania corporation founded in 1946. Unit commenced
operations in 1980 and was acquired by Autoclave in 1984. From 1986 to 1995, the
predecessor Company consisted of three operating segments: Burton Corblin,
Autoclave Engineers Group and Unit Instruments. Burton Corblin designed and
manufactured high pressure diaphragm and piston compressors. Autoclave Engineers
Group designed, manufactured and marketed autoclaves, compressors, valves,
fittings and related systems, components and accessories, principally for
elevated temperatures and/or pressure applications. During fiscal 1995, Burton
Corblin was sold and a formal plan for the disposition of Autoclave Engineers
Group was adopted by the Board of Directors of the predecessor Company. In the
second quarter of fiscal 1996, Autoclave Engineers Group was sold (see "Item 1.
Discontinued Operations" for a more complete narrative of the above-referenced
restructuring). At the Annual Meeting of Shareholders held in November, 1995,
the shareholders approved the change of the predecessor Company's state of
incorporation from Pennsylvania to California, pursuant to a Plan of Merger
which provided for Autoclave to be merged into its wholly-owned subsidiary, Unit
Instruments, Inc. In conjunction with this action, the corporate office in Erie,
Pennsylvania was relocated to Unit's facilities in Yorba Linda, California. As
used herein, the term "Company" shall mean and refer to Unit, its predecessor
Company and its subsidiary, as appropriate.

  Following the restructuring, the Company consists of one operating
segment which designs, manufactures and markets mass flow controllers that are
used to control the flow of process gases into semiconductor wafer fabrication
chambers and other related semiconductor fabrication equipment. Also included in
this segment is the design, manufacture and marketing of ultra high-purity gas
isolation boxes, gas panels and valve manifold boxes for use in semiconductor
wafer manufacturing processes. Wafer fabrication involves deposition, etching
and stripping processes that each require the introduction of process gases that
must be precisely controlled to ensure system throughput and process yields. The
Company's products are marketed and sold worldwide through a direct sales force
and sales representatives. Principal marketing and service centers are
maintained in the United States, Ireland, Japan and Korea.

ACQUISITION OF CONTROL SYSTEMS, INC.
------------------------------------

  The Company acquired Control Systems, Inc. ("CSI") on June 3, 1996.  CSI
fabricates high-purity gas isolation boxes and gas panels for semiconductor
manufacturers.  The acquisition of CSI was accounted for as a purchase with
consideration of $1.2 million in cash and 289,000 shares of Common Stock valued
at approximately $4.0 million.  This acquisition resulted in the

                                       3
<PAGE>
 
recording of goodwill of approximately $4.8 million. CSI was based in Rio
Rancho, New Mexico and was operated as a wholly-owned subsidiary of the Company.
During fiscal 1998, the Company consolidated most of the operations of CSI's Rio
Rancho facility into its facility in Chandler, Arizona. See Management
Discussion and Analysis of Financial Condition and Results of Operations for
discussion of 1998 restructuring plan, including the write-off of $4,125,000 of
CSI goodwill.

DISCONTINUED OPERATIONS
-----------------------

  During fiscal 1995, the Company sold its Burton Corblin subsidiary to
James Howden & Godfrey Overseas Limited for $9.1 million and the forgiveness of
certain intercompany debt owed to Burton Corblin. A gain on disposal of Burton
Corblin of $963,000 was recognized in fiscal 1995. Subsequent to the sale of
Burton Corblin, the Company adopted a formalized plan for the disposition of
Autoclave Engineers Group ("AEG") and, correspondingly, the results for AEG for
fiscal 1995 were accounted for as discontinued operations. In September, 1995,
the Company sold AEG to Snap-tite, Inc. and recorded a gain on disposal of
$1,454,000. The operating results of AEG for fiscal 1996, through the date of
sale, were recorded as discontinued operations.

  In conjunction with the sale of Burton Corblin and AEG, the Company also
adopted a restructuring plan that involved the merger of Autoclave Engineers,
Inc. into its wholly-owned subsidiary, Unit Instruments, Inc., and the
relocation of the corporate office function to Unit Instruments' headquarters in
Yorba Linda, California. The corporate office function was transferred to Unit
Instruments in September, 1995 and the shareholders, at the Annual Shareholders'
Meeting in November, 1995, approved the merger of Autoclave Engineers, Inc. into
Unit Instruments, Inc., with Unit being the surviving corporation in such
merger. As a result of these activities, restructuring costs of $1,230,000 were
incurred during fiscal 1995 and $373,000 of costs were recorded for fiscal 1996.

SUBSEQUENT EVENT
----------------

  On July 2, 1998, United States Filter Corporation ("U.S. Filter"),
Kinetics Acquisition Corp., a California corporation and wholly-owned subsidiary
of U.S. Filter ("Subcorp"), and Unit Instruments, Inc. ("Unit") executed an
Agreement and Plan of Merger whereby Subcorp will be merged with and into Unit
(the "Merger") and Unit will survive the merger (the "Surviving Corporation")
and become a wholly-owned subsidiary of U.S. Filter.

  Pursuant to the terms of the Agreement and Plan of Merger, U.S. Filter
had a 30-day period, ending on July 31, 1998, to complete due diligence. On July
31, 1998, U.S. Filter notified Unit that it was dissatisfied with certain items
relating to the Company that resulted from their due diligence review, including
the declining prospects for the Company and its business due to the
deteriorating fundamentals in the semiconductor equipment market, and indicated
that they intended to terminate the Agreement and Plan of Merger unless these
items were cured or

                                       4
<PAGE>
 
resolved to U.S. Filter's satisfaction within 30 days. On August 5, 1998, U.S.
Filter and Unit agreed to amend the terms of the Agreement and Plan of Merger
and executed the First Amendment to the Agreement and Plan of Merger,
collectively ("the Merger Agreement"). With the execution of the First
Amendment, U.S. Filter has agreed that their due diligence condition has been
satisfied, except for the requirement that Needham & Company, Inc. ("Needham")
terminate certain registration rights associated with a warrant held by Needham
for 100,000 shares of the Company's common stock.

  On July 7, 1998, Unit filed Form 8-K which summarized the Agreement and
Plan of Merger and included a complete copy of the Agreement and Plan of Merger.
Included with Unit's Form 10-K, for the period ending May 31, 1998, is Exhibit
10.14, First Amendment to the Agreement and Plan of Merger, dated August 5,
1998. The below-referenced summary of the terms of the Merger Agreement is
qualified in its entirety by reference to the full text of the Agreement and
Plan of Merger and to First Amendment to the Agreement and Plan of Merger.

  Upon the effectiveness of the Merger, each outstanding share of common
stock, par value $0.15 per share ("Common Stock"), of Unit, with the exception
of shares held by shareholders who properly exercise dissenters' rights under
the Corporations Code of the State of California, will be converted into a
number of shares of U.S. Filter's common stock equal to the Exchange Ratio (as
defined below), collectively, the "Merger Consideration."

  The exchange ratio (the "Exchange Ratio") will be calculated as follows:
(a) if the average daily closing price (the "Average Closing Price") on the New
York Stock Exchange of U.S. Filter's common stock during the 20 consecutive
trading days ending five days prior to the Closing Date is above $26.00, the
Exchange Ratio will be equal to $11.03 divided by the Average Closing Price; and
(b) if the Average Closing Price is equal to or less than $26.00, the Exchange
Ratio will be equal to $11.03 divided by $26.00. If the Average Closing Price is
less than $24.00, Unit may terminate the Merger Agreement.

  The closing of the Merger is subject to certain conditions, but not
limited to, the termination of certain registration rights held by Needham,
expiration of the Hart-Scott-Rodino waiting period, and approval by Unit
shareholders. The transaction is expected to close in October, 1998. Following
the merger, Unit will become a wholly-owned subsidiary within U.S. Filter's
Kinetics Group ("USF Kinetics").

  At the effective time (the "Effective Time"), each outstanding stock
option or warrant to purchase Unit stock shall automatically convert into an
option to purchase a number of shares of U.S. Filter common stock equal to (x)
the number of shares of Unit Common Stock issuable immediately as of the date of
this Agreement upon exercise of such Unit stock option or warrant multiplied by
(y) the Exchange Ratio with an exercise price equal to the exercise price which
existed under the corresponding Unit stock option or warrant divided by the
Exchange Ratio, and with such other terms and conditions, subject to U.S.
Filter's approval, as were in effect under such Unit stock option or warrant as
of the date of this Agreement.

                                       5
<PAGE>
 
  Fractional shares will not be issued, but the pro rata portion of the
net proceeds of the sale of all such shares will be paid in cash to the persons
entitled thereto. As a result of the conversion of the Unit Common Stock, the
Unit Common Stock will be de-listed from the Nasdaq National Market tier of The
Nasdaq Stock Market and will not be listed on any national securities exchange
or quoted in any inter-dealer quotation system, and holders of Unit Common Stock
will become shareholders of U.S. Filter. 

  On July 17, 1998, the Company announced in a press release that it intends to
reduce its worldwide workforce by approximately 15% and is initiating partial
domestic plant shutdowns in response to the continuing downturn in the
semiconductor equipment market.

  The partial plant shutdowns will be effected by closing domestic
facilities on Fridays, allowing for only limited services and production on such
days. The magnitude and financial impact of these actions has not yet been
determined, but will be included in the Company's quarterly report on Form 10-Q
for the first fiscal quarter ending August 29, 1998.

PRODUCTS
--------

  The Company designs, manufactures and markets mass flow controllers
("MFCs") that are used primarily in the fabrication of integrated circuits
("ICs"). The fabrication of ICs fundamentally involves the deposition of
insulating or conducting materials onto a wafer, the etching of the wafer to
remove unprotected deposited material, and the stripping of the leftover
photoresist from the wafer after etching. This process may be repeated up to 30
or more times in the fabrication of a sophisticated IC. Each step of the wafer
fabrication process involves the introduction of various gases that must be
virtually contamination-free and accurately controlled at a precise flow rate
and volume. Following the processing of each wafer, process gases are completely
evacuated from the fabrication chamber and then re-introduced at the beginning
of the next wafer processing cycle.

  Unit's mass flow controllers measure gas (or mass) flow by channeling a
small portion of the gas into a capillary tube that produces a thermal
differentiation. This thermal difference is measured by a sensor that feeds the
signal information to a control circuit that adjusts the internal valve to
either increase or decrease gas flow. Accuracy, speed of response, repeatability
and particle generation are the key technical criteria the industry uses in
evaluating MFCs.

  The Company primarily produces two types of MFCs: elastomer and all-
metal seal. Elastomer MFCs incorporate many of the same subassemblies as all-
metal seal products, but use less costly organic or elastomer seals that are
typically used in less process sensitive applications. All metal MFCs
incorporate metal seals exclusively and are typically used in more demanding
process control environments. The Company also designs, manufactures and markets
ultra high-purity gas delivery systems. These products include valve manifold
and gas distribution boxes, custom gas distribution systems and gas panels.

                                       6
<PAGE>
 
  The Company introduced an expanded line of mass flow controllers during
fiscal 1997. These new products include analog/digital MFCs, full digital MFCs
that are compliant with the Device Net protocol, two new models of MFCs that are
specially designed for use with Safe Delivery Source ("SDS"(TM)) for ion implant
processes, and a "mini" MFC that has a reduced footprint. In fiscal 1998, the
Company introduced a digital high flow MFC and its patented Z-Bloc(TM) modular
gas system.
 
  The Company has been developing a modular gas delivery system for the
past several years and during the latter part of 1997, several prototype ("Z-
Bloc") systems were delivered for evaluation. The Z-Bloc system features down-
ported components that are mounted with Unit's proprietary Z-Seal metal seals on
machined blocks, reducing the gas box size and providing significantly easier
maintenance than conventional "welded" gas delivery systems. During fiscal 1998,
the Company continued to supply customers with prototype Z-Bloc systems and made
several design improvements to lower cost and enhance ease of fabrication.


  Customer service is provided through five domestic and ten international
service centers.  MFCs and related parts and service represented over 80% of
Unit's sales for fiscal 1998, 1997 and 1996.

MARKETING AND CUSTOMERS
-----------------------

  The Company markets its MFCs directly to a well-defined group of original
equipment manufacturers ("OEMs") of wafer fabrication and related process
equipment.  In addition, the Company markets directly to the semiconductor
manufacturers ("end users") who purchase directly from the Company for spares
and replacement MFCs.  Additionally, end users can "nominate" a particular MFC
supplier when purchasing fabrication equipment from the OEMs.  The Company
believes this "pull through" effect by the end users is an important element in
determining market share in the industry.  OEMs accounted for approximately 52%
of total MFC related Company sales in fiscal 1998, with the balance of sales
attributable to end users and industrial (non-semiconductor) customers.

  Unit primarily markets its products through a domestic direct sales force
augmented by manufacturer representatives.  Internationally, Unit markets
through a direct sales force, manufacturer representatives and distributors.
The Company has nine domestic and five international sales offices.  In addition
to direct sales efforts, the Company utilizes regular participation in trade
shows, frequent advertising in trade journals, and placement of evaluation units
to market its products.  The Company also works with existing and potential
customers in prototype development efforts for "next generation" equipment
applications.

  For fiscal year 1998, Applied Materials Inc. accounted for 22% of Unit's total
sales and Lam Research Corporation accounted for 7% of total sales.

                                       7
<PAGE>
 
  Export and international sales were approximately 21%, 19% and 17% of total
sales in fiscal 1998, 1997 and 1996, respectively.  However, the Company
believes that a substantial portion of domestic product shipments to OEMs are
subsequently shipped to end users outside of the United States.

BACKLOG
-------

  The Company's backlog at May 31, 1998 was approximately $1.2 million, compared
to backlog at May 31, 1997 of approximately $2.0 million.  General industry
practice allows for orders to be rescheduled or canceled without significant
penalty.  Most customer orders in backlog are deliverable within one to four
weeks and, accordingly, the Company's backlog at any given date is not
necessarily indicative of actual sales for any succeeding period.

MANUFACTURING AND SUPPLIERS
---------------------------

  Unit designs, manufactures and assembles precision components at its own
facilities but also relies on third-party suppliers for various machined parts
and electronic subassemblies.  All final assembly activity is performed in
cleanrooms.  Unit has four manufacturing facilities: the main facility in Yorba
Linda, California, two smaller facilities in Japan and Ireland, and a facility
in Chandler, Arizona that produces gas panel products.  Customers are
increasingly seeking reductions in lead-times, increases in quality and higher
price/performance levels.  To meet and exceed customer expectations, several
manufacturing strategies have been implemented, including TQM and team
benchmarking.  The Company has augmented its quality focus over the past several
years with the goal of reducing costs and increasing customer satisfaction.  In
fiscal 1995, the Company's facility in Ireland achieved registration under ISO
9002.  In fiscal 1996, the Company achieved registration under ISO 9001 for its
main manufacturing facility in Yorba Linda, California and in fiscal 1997
achieved registration under ISO 9001 for its service facility in Austin, Texas.
In fiscal year 1998, the Company achieved ISO 9001 registration for its Z-Bloc
operation in Yorba Linda, California, its fabricated gas system manufacturing
facility in Chandler, Arizona, and its MFC service center, also in Chandler.
ISO 9000 registration is an international quality standard that signifies that a
manufacturer has appropriate controls, documentation and procedures in all
significant aspects of its manufacturing operation to produce consistent high
quality products.  ISO 9001 is the most comprehensive level in the ISO 9000
series.

  Most materials used in the Company's products are standard items that are
available from multiple sources.  However, certain raw materials are obtained
from a limited number of suppliers and have an extended lead-time. Although the
Company seeks to limit its dependency on limited sources suppliers and extended
lead-times for raw materials, the partial or complete loss of these suppliers,
or an abrupt increase in lead-times for raw material, could have a material
adverse effect on the Company's results of operations.

                                       8
<PAGE>
 
  The Company's standard warranty period ranges from one to three years.  The
Company has one end user customer to which it has issued a ten year warranty in
conjunction with an exclusive MFC supplier agreement.  This warranty agreement
includes a five year unconditional warranty and a limited five year warranty
term.  The Company does not consider physical damage from abuse or misuse as
covered by the unconditional warranty.  The Company has established a warranty
reserve for this extended warranty agreement based upon mean time between
failure data that it believes to be the most appropriate criteria for estimating
this warranty liability.  Management believes the costs associated with the
extended ten-year warranty will not have a material impact on the consolidated
results of operations; however, there can be no assurance that its methodology
for establishing the warranty reserve will be adequate during the duration of
the extended warranty period.

INTELLECTUAL PROPERTY
---------------------

  The Company holds various U.S. and foreign patents on certain design and
functional aspects of its mass flow controllers.  In addition, the Company has
patent applications pending on the Z-Seal and Z-Bloc.  Although the Company
believes its patents have value and may potentially provide a competitive
advantage, it believes the success of the business depends primarily on product
innovation, technical expertise and know-how of its personnel, along with other
factors.  The Company has developed proprietary information relating to the
design and manufacture of its products, along with the metrology of gases used
in the IC manufacturing process.  There can be no assurance that competitors
will not independently develop substantially equivalent or superior proprietary
information.

COMPETITION
-----------

  The market for the Company's mass flow controllers is highly competitive.
Significant competitive factors include product quality and performance, price,
delivery lead-times, customer service and support, breadth of product offering,
size of installed base and historical relationship with the customer.  The
Company believes that it competes favorably with respect to these factors with
the primary exception of being predominantly a one product supplier, i.e., mass
flow controllers.  The Company has three major domestic competitors and two
major Japanese competitors.  Unit has a small manufacturing facility in Japan to
support and augment its efforts to penetrate the Japanese market and, while some
market share penetration has occurred, it is still limited.  For the Company to
maintain and enhance its competitive position, significant continuing
investments in engineering, manufacturing process improvements, marketing,
customer service and support will be required for the foreseeable future.

                                       9
<PAGE>
 
PRODUCT DEVELOPMENT
-------------------

  The Company is a leader in the development of mass flow controllers and
peripheral accessories.  The Company's product development activities are
focused on enhancing existing products and developing new products that will
successfully compete on the basis of  performance, reliability and pricing.  A
variety of engineering skills are required in the development of the Company's
products, including mechanical, thermal dynamics, electrical, gas metrology,
sensor technology and software development.  Certain skills that are outside the
Company's core technical competencies, or augment internal expertise, are
acquired through consulting engineers.  The Company has 39 full-time employees
dedicated to research and development activities.

  For fiscal 1998, 1997 and 1996, the Company spent $4,533,000, $4,035,000 and
$3,757,000, respectively, for research, development and engineering activities.

INVENTORY AND WORKING CAPITAL
-----------------------------

  The Company is required to carry significant amounts of inventory to meet the
rapid delivery requirements of its customers and to buffer against extended
lead-times for certain raw materials.  The Company does not provide extended
payment terms to its customers.  As a general policy, returns, for customer
convenience, are not allowed by the Company.

ENVIRONMENTAL COMPLIANCE
------------------------

  The Company has identified ground water and soil contamination at its
previously owned Erie, Pennsylvania operation of Autoclave Engineers Group.
These findings have been reported to the appropriate authorities and the Company
has established a reserve of $661,000 for estimated costs of further
investigation and potential remediation related to the matter.  In the opinion
of management, the final outcome of this matter will not have a material adverse
effect on the Company's financial position or results of operations.  See Note
12 of Notes to Consolidated Financial Statements.

  The Company's facilities are subject to federal, state and local authorities'
environmental control regulations.  In the opinion of management, compliance
with these laws and regulations has not had, and will not have, a material
effect upon the capital expenditures, earnings and competitive position of the
Company.

YEAR 2000 COMPLIANCE
--------------------

  The Company has performed an examination of its major software applications to
determine whether each system will be able to process date-based information
correctly as the year 2000 approaches.  The review included an examination of
the software code currently utilized by the Company and obtaining confirmation
from others with whom it does significant

                                      10
<PAGE>
 
business to determine their year 2000 compliance status.
 
  The Company anticipates it will be year 2000 compliant by December, 1998 for
all accounting and MIS systems application software.  Accordingly, the Company
believes that, based on its current examination, the year 2000 will not have a
material adverse impact on the Company's operations and that the costs to
accommodate the year 2000 will not be material.  However, there can be no
assurance that software incompatibility with the year 2000 on the part of the
Company or any of its significant suppliers or customers will not cause an
interruption of operations or other system functionality, or that the Company
will not incur substantial costs to avoid such events.

EMPLOYEES
---------

  At May 31, 1998, the Company and its subsidiaries had 315 employees, of which
198 were in manufacturing and service support, 48 in marketing, sales and
applications engineering, 39 in research, development and engineering and 30 in
finance and administration.  As of the end of fiscal 1998, the Company had 265
employees in the United States, 29 in Europe and 21 in the Pacific Rim.  None of
the Company's employees are represented by a union or other collective
bargaining agent, and the Company considers its relations with its employees to
be good.


ITEM 2.  PROPERTIES

  The Company maintains its headquarters and principal manufacturing facility in
a leased 82,000 square foot building in Yorba Linda, California.  The lease on
this facility expires in 2006 and provides for a 5-year renewal option.  The
Company owns a 7,000 square foot manufacturing facility in Dublin, Ireland;
leases a 2,700 square foot manufacturing facility in Tokyo, Japan; and has four
leased service centers in San Jose, California, Chandler, Arizona, Dallas and
Austin, Texas. The Chandler, Arizona facility manufacturers high-purity gas
fabrication systems, as well as providing facilities for an MFC service center.
The Rio Rancho, New Mexico leased facility is no longer used.  Its lease
terminates on December 31, 1998 and the Company is currently undertaking efforts
to find a replacement lessee.  Internationally, Unit has leased service centers
in Kyusha Island and Osaka, Japan and Sungnam, Korea.

The Company believes that the existing facilities are generally suitable and
adequate for its business.


ITEM 3.  LEGAL PROCEEDINGS
 
  The Company filed suit against six suppliers of zinc-plated fasteners in July,
1997 in Superior Court of the State of California for the County of Orange. The
Company is seeking actual and consequential damages to be determined. The suit
alleges that Unit

                                      11
<PAGE>
 
was shipped a defective batch of fasteners that failed in MFC products. Each
defendant in such suit has responded to the Company's complaint. None of such
defendants has filed a counterclaim against the Company.

  The Company is not involved in any material pending legal proceedings to which
it is a party or to which any of its property is subject.


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

  No matter was submitted to a vote of security holders of the Company during
the fourth quarter of the fiscal year covered by this report.

                                    PART II
                                        

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

COMMON EQUITY MARKET DATA
-------------------------

  The Company's Common Stock trades on the Nasdaq National Market tier of The
Nasdaq Stock Market under the Symbol:  UNII.  High and low closing prices for
the Company's Common Stock, as reported on Nasdaq, and cash dividends paid per
share, for the fiscal quarters indicated, were as follows:

<TABLE>
<CAPTION>
                                             
                                                                                          DIVIDENDS
               PERIOD                         HIGH                   LOW                     PAID          
              ----------                  ------------               ---                     ----
<S>            <C>                        <C>                  <C>                  <C>
    1997       First Quarter                   $14.500               $8.625                   --
               Second Quarter                   10.625                8.250                   --
               Third Quarter                    10.625                8.125                   --
               Fourth Quarter                    9.625                7.250                   --
 
    1998       First Quarter                   $14.500               $8.938                   --
               Second Quarter                   14.250                9.750                   --
               Third Quarter                    10.500                8.500                   --
               Fourth Quarter                    9.750                6.375                   --
</TABLE>

  The Company had 263 holders of record of its Common Stock on May 31, 1998.
Based on the information available to the Company, there are approximately 1,571
beneficial shareholders.  The Company suspended its regular quarterly dividends
in fiscal 1996 and does not anticipate resuming cash dividend payments in the
foreseeable future.

                                      12
<PAGE>
 
ITEM 6.   SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
(amounts in thousands, except  per share data)
-----------------------------------------------------------------------------------------------------------------
YEARS ENDED MAY 31,                        1998            1997            1996           1995           1994
-----------------------------------------------------------------------------------------------------------------
<S>                                   <C>              <C>             <C>            <C>            <C>
Net sales                                   $52,234         $43,271         $65,568        $48,256        $33,141
Income (loss) from continuing
  operations before cumulative
  effect of accounting change                (4,649)         (4,308)          4,778            705           (212)
Discontinued operations:
  Income, net                                    --              --             750          1,334          1,186
  Gain on disposal, net                          --              --           1,454            963             --
Net income (loss)                            (4,649)         (4,308)          6,982          3,002          1,198
                                   ------------------------------------------------------------------------------
Basic earnings per share:
Income (loss) from continuing
  operations before cumulative
  effect of accounting change               $ (1.08)        $ (0.99)        $  1.16        $  0.17        $ (0.05)
Discontinued operations                          --              --            0.53           0.54           0.28
                                   ------------------------------------------------------------------------------ 
Net income (loss)                             (1.08)          (0.99)           1.69           0.71           0.28
Diluted earnings per share:
Income (loss) from continuing
  operations before cumulative
  effect of accounting change               $ (1.08)        $ (0.99)        $  1.09        $  0.16        $ (0.05)
Discontinued operations                          --              --            0.50           0.53           0.28
                                   ------------------------------------------------------------------------------ 
Net income (loss)                             (1.08)          (0.99)           1.59           0.69           0.28
Cash dividends declared per share                --              --         $  0.06        $  0.24        $  0.24
Average shares used in computing
  earnings per share
            Basic                             4,295           4,375           4,125          4,218          4,214
            Diluted                           4,295           4,375           4,393          4,340          4,268

MAY 31,                                        1998            1997            1996           1995           1994
-----------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
Working capital                             $19,722         $23,696         $26,724        $27,573        $25,128
Total assets                                 40,103          50,964          52,780         51,902         58,250
Long-term debt                                   --              58              --            453            952
Shareholders' equity                         33,010          42,661          43,224         38,478         37,721
-----------------------------------------------------------------------------------------------------------------
</TABLE>
The selected financial data should be read with the related consolidated
financial statements and notes thereto, included herein.

                                      13
<PAGE>
 
  In fiscal 1994, the Company changed the method of accounting for overhead
costs in certain inventories.  Prior to 1994, costs related to material
processing and handling activities were applied to production as a function of
direct labor incurred; however, effective in 1994, they were applied based on
their relationship to material costs incurred.  The cumulative effect of
adopting this change as of June 1, 1993 of $224,000, or $.05 per share, is
included in the net income and net income per share for the fiscal year ended
May 31, 1994.


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

  The following discussion and analysis should be read in conjunction with the
Company's consolidated financial statements and the notes related thereto.

<TABLE>
<CAPTION>
RESULTS OF OPERATIONS
                                                              Operating Percentages
                                                 ------------------------------------------------
                                                      1998              1997            1996
                                                 ---------------   --------------   -------------
<S>                                              <C>               <C>              <C>
Net sales                                                100.0%           100.0%           100.0%
Cost of net sales                                         69.2%            77.6%            60.2%
Selling and administrative expenses                       23.1%            28.5%            22.2%
Restructuring costs                                        9.4%             1.3%             0.6%
Research and development expenses                          8.7%             9.3%             5.7%
Income (loss) from operations                            (10.5%)          (16.7%)           11.2%
Income (loss) from continuing operations                 (10.1%)          (10.0%)            7.3%
Discontinued operations                                    0.0%             0.0%             3.4%
Net income (loss)                                         (8.9%)          (10.0%)           10.6%
</TABLE>

1998 COMPARED TO 1997
---------------------

  Sales for fiscal 1998 increased 20.7% to $52.2 million from $43.3 million in
fiscal 1997.  Management believes the increase in sales was primarily due to the
recovery in the semiconductor market that began approximately at the beginning
of calendar 1997.  This recovery continued until approximately the beginning of
calendar 1998 when another, more severe, downward trend became apparent in the
semiconductor equipment market.  The Company was able to increase sales on a
fiscal year basis because the most recent downturn did not affect the first and
second quarters, and only negatively impacted the latter part of the third
fiscal quarter.

  The gross profit margin for fiscal 1998 increased to 30.8%, from 22.4% in
fiscal 1997.  The increase was mainly the result of increased efficiency due to
higher manufacturing volume, lower overhead rates due to higher volume, and cost
cutting programs affecting material acquisition costs and labor efficiency.

                                      14
<PAGE>
 
     Selling, general and administrative expenses ("SG&A") decreased as a
percentage of sales in fiscal 1998 to 23.1%, from 28.5% in fiscal 1997.  This
was due to the increased sales base and a 2% reduction in actual SG&A expenses
from fiscal 1997 to fiscal 1998.  The reductions in expenses were attributable
to cost cutting and the third quarter fiscal 1998 restructuring that began to
result in cost savings in the fourth quarter of fiscal 1998.

     During the third quarter of fiscal 1998, the Company approved a
restructuring plan that included the closure of the CSI Rio Rancho, New Mexico
manufacturing and administrative facility. Operations and administrative
functions for the Rio Rancho facility were transferred to the Chandler, Arizona
facility and the Yorba Linda, California corporate office, respectively.  The
restructuring was effected to lower the cost of operations of high-purity gas
systems production and to improve efficiency by centralizing certain
administrative and marketing functions.

The categories of costs included in the restructuring charge are as follows:
<TABLE>
<CAPTION>
 
<S>                                                  <C>
     Severance and other employee related costs       $  288,000
     Facility closure costs                              136,000
     Impairment of CSI goodwill                        4,125,000
     Fixed asset disposition and write-off               382,000
                                                      ----------
 
     Total restructuring costs                        $4,931,000
                                                      ==========
</TABLE>

     Thirteen employees were terminated as a result of the restructuring,
including two officers of the Company, resulting in a charge of $288,000, of
which $135,000 has been paid and $153,000 is recorded as a current liability as
of fiscal year end.

     The CSI Rio Rancho facility is no longer utilized, except for a few
engineering employees and a sales representative who temporarily remain at the
facility.  Costs to maintain the facility and remove the leasehold improvements
were accrued in the third quarter in the amount of $136,000.  As of  May 31,
1998, $95,000 of this accrual remains as a current liability.  The Company is
looking for a tenant to sublease the building or to arrange to terminate the
lease in exchange for providing the lessor with a new lessee.  The lease of the
Rio Rancho facility expires on December 31, 1998.

     Due to the decline in expected sales volume of high-purity gas systems, and
a curtailment of product offerings, management determined, in accordance with
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived to Be Disposed of" ("SFAS
121") that an asset impairment exists. Management has determined that future
undiscounted cash flows from the high-purity gas system business are not
sufficient to recover the carrying value of the related goodwill over its
remaining life of approximately 10 years. Therefore, the Company determined that
the high-purity gas system related goodwill, with a remaining unamortized
carrying value of $4,125,000, is fully impaired

                                      15
<PAGE>
 
and has written-off the entire carrying amount of such goodwill. No tax
deduction is allowed for this goodwill write-off. The fixed assets of the CSI
Rio Rancho facility that are useable were relocated to Yorba Linda or Chandler.
The fixed assets that were not useable or removable were written-off in the
amount of $382,000.

     During fiscal 1997, a restructuring charge of $558,000 was incurred for
severance related costs associated with the consolidation of the Tempe, Arizona
service center into the Chandler, Arizona facility.

     Research, development and engineering expense ("RD&E") for fiscal 1998
increased by 12.3% over fiscal 1997 RD&E expenses.  As a percentage of sales,
RD&E expenses were slightly reduced to 8.7% in fiscal 1998, as compared to 9.3%
in fiscal 1997.  The Company is continually applying resources to the
enhancement of existing products and the development of new products and new
versions of existing products.  The Company believes that these efforts are
essential to maintaining and increasing its competitive position.

     Interest income declined 10.6% in fiscal 1998, as compared to fiscal 1997,
due to lower average cash balances.

  Other expense was $441,000 in fiscal 1998, as compared to $39,000 of income
for fiscal 1997.  Of the $441,000 expense, $265,000 was due to currency
transaction losses incurred by the Company's Japanese subsidiary.  The value of
the Japanese yen, as measured in U.S. dollars, declined during fiscal 1998.

     A loss before income taxes of $5,283,000 was recorded in fiscal 1998, as
compared to a loss before income taxes of $6,528,000 recorded in 1997.  Without
the restructuring charge of $4,931,000, the fiscal 1998 pre-tax loss was
$352,000, compared to fiscal 1997 pre-tax loss of $5,970,000, excluding the
fiscal 1997 restructuring charge of $558,000.

     The tax benefit for fiscal 1998 is $634,000, which is 12% of pre-tax loss,
as compared to a tax benefit of $2,220,000 in fiscal 1997, which was 34% of
fiscal 1997 pre-tax loss.  The fiscal 1998 tax benefit was only 12% of pre-tax
loss, mainly because the goodwill write-off of $4,125,000, described in the
restructuring paragraphs above, is not deductible for income tax purposes.

     A net loss of $4,649,000, or $1.08 per share, was recorded in fiscal 1998,
as compared to a net loss of $4,308,000 in fiscal 1997, or $0.99 per share.  The
net loss of fiscal 1998 was largely due to restructuring charges of $4,931,000,
of which $4,125,000 was a non-tax deductible charge.

     The Company has performed an examination of its major software applications
to determine whether each system will be able to process date-based information
correctly as the year 2000 approaches. The review included an examination of the
software code currently

                                      16
<PAGE>
 
utilized by the Company, and obtaining confirmation from others with whom it
does significant business, to determine their year 2000 compliance status.
 
  The Company anticipates it will be year 2000 compliant by December, 1998 for
all accounting and MIS systems application software.  Accordingly, the Company
believes that, based on its current examination, the year 2000 will not have a
material adverse impact on the Company's operations and that the costs to
accommodate the year 2000 will not be material.  However, there can be no
assurance that software incompatibility with the year 2000 on the part of the
Company or any of its significant suppliers and customers will not cause an
interruption of operations or other system functionality, or that the Company
will not incur substantial costs to avoid such events.

1997 COMPARED TO 1996
---------------------

  Sales from continuing operations for fiscal 1997 decreased 34% to $43.3
million from $65.6 million in fiscal 1996.  Management believes that this sales
decline was mainly attributable to the industry slowdown that started
approximately in the middle of 1996, and that the downturn appeared to bottom
out near the end of calendar year 1996.  Since that time, the Company has
experienced a slow recovery in sales activity from the depressed business levels
of late 1996 until January of 1998 when another industry downturn began to have
a negative impact on the Company's sales orders.

  The Company primarily sells to original equipment manufacturers ("OEMs") that
supply equipment used for the production of semiconductors.  Therefore, the
downturn in the semiconductor equipment industry had a strong negative impact on
the Company's sales.  As the market weakened, the Company's OEM customers
immediately and substantially reduced their purchases of MFCs.  Some OEMs began
to liquidate their inventories of MFCs, which exacerbated the effect the
industry downturn had on the Company's sales volume.  In addition, the Company
generally has a limited backlog due to a short production cycle which
accentuates fluctuations in order rates.  The reduction in sales was partially
offset by sales generated from CSI, which was acquired on June 3, 1996 (fiscal
1997) of approximately $5.1 million.  Sales of CSI's gas distribution systems
were also lower than expected due mainly to a reduction in capital spending by
CSI's largest customer.  The downturn in the semiconductor equipment market has
been worldwide and has had a negative impact on both domestic and international
sales of the Company.

  The gross profit margin for fiscal 1997 was 22.4%, as compared to 39.8% in the
prior year.  This reduction can be attributed to the large decrease in
production due to substantially lower sales volume.  The reduction in production
reduced overhead absorption rates and labor efficiency, thereby negatively
impacting the gross profit margin.  Substantial layoffs in the production
departments were made as a result of the reduced volumes and organization and
cost cutting measures were implemented in response to the downturn.

                                      17
<PAGE>
 
  Selling, general and administrative expenses for fiscal 1997 decreased by
15.4% from fiscal 1996.  However, as a result of the reduced sales volume, these
expenses as a percent of sales for fiscal 1997 increased to 28.5% of sales as
compared to 22.2% in the prior year.  The expenses were reduced by restructuring
some functions, reducing the workforce and reducing costs.

  A restructuring charge of $558,000 was incurred in fiscal 1997 for severance
related expenses and costs associated with the consolidation of facilities.  In
fiscal 1996, a restructuring charge of $373,000 was recorded for employee
severance expense, legal fees and other expenses associated with the closure of
the Erie, Pennsylvania corporate office.

  Research, development and engineering expenses for fiscal 1997 increased by
7.4% over fiscal 1996.  As a percent of sales, such expenses increased to 9.3%
from 5.7% in fiscal 1996.  The Company is committed to a strong research and
engineering function, hence these expenses were not reduced in response to the
change in sales activity.  The Company believes that the continued timely
development of new products and enhancement of existing products is essential to
maintaining and increasing its competitive position.

  Interest income increased to $822,000 in fiscal 1997, from $690,000 in fiscal
1996, because the cash balances from the sale of AEG were available for the
entire fiscal year.

  A loss from continuing operations before income taxes of $6.5 million was
incurred in fiscal 1997 compared to income from continuing operations before
income taxes of $7.8 million in fiscal 1996.  This $14.3 million reduction in
operating earnings, before income taxes, is almost entirely due to the reduction
of $22.3 million of sales from fiscal 1996 to fiscal 1997.

  An income tax benefit on continuing operations was provided for at a rate of
34.0% for fiscal 1997.  Income tax expense was provided for at a rate of 38.7%
for fiscal 1996 on continuing operations.  Both rates are negatively effected by
the non-deductibility of goodwill amortization.

  A net loss of $4.3 million, or $.99 a share, was incurred for fiscal 1997.  In
fiscal 1996, the Company recorded income from continuing operations of $4.8
million, or $1.09 a share.  In fiscal 1996, income from discontinued operations
resulted from Autoclave Engineers Group operations through the date of sale in
September, 1995.  A net gain of $1.5 million was recorded on the sale of
Autoclave Engineers Group.  Net income for fiscal 1996 was $7.0 million, or
$1.59 per share.

                                      18
<PAGE>
 
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------

     In fiscal 1998, the Company generated $4,150,000 in cash from its operating
activities.  Contributing to the operating cash flow were depreciation and
amortization expenses of $2,772,000, reductions in inventories of $1,062,000,
and net tax refunds of $1,482,000.  In addition to generating cash from
operations, the Company obtained cash from the exercise of employee stock
options and related tax benefit of $1,123,000.  The reductions in inventories
were due to an effort to reduce the amount of inventory on-hand and maintain the
same level of response time of filling orders, generally within two weeks of
receipt.  Contributing to the net tax refund were refunds of federal income
taxes received due to the carryback of the fiscal 1997 loss.  The unusually
large amount of cash received from the exercise of employee stock options was
generally the result of a favorable stock market value in conjunction with a
large number of option contracts expiring during fiscal year 1998.

     The Company used $1,192,000 for the acquisition of fixed assets, of which
$472,000 was used to establish a service center in Virginia.  The Company used
$6,042,000 to buy 519,000 shares of Company stock.  412,000 of these shares were
purchased from a former director and his family members.  The net cash used by
the Company in fiscal 1998 was $2,261,000.

     Cash balances as of May 31, 1998 were $9,942,000, as compared to cash of
$12,203,000 as of May 31, 1997.  The major reason for the cash reduction was the
purchase of Company stock.  Inventory balances as of May 31, 1998 were
$7,638,000, as compared to $8,700,000 as of May 31, 1997.  The reduction was
mainly the result of efforts to streamline the purchasing and inventory
functions, as well as to reduce the cost of purchased parts.  Goodwill, as of
May 31, 1998, was $4,034,000 and was $8,577,000 as of May 31, 1997.  The
reduction in the carrying value of goodwill was due to the goodwill write-off,
which is part of the restructuring charge of $4,931,000.

     The Company has a revolving credit line with a bank which provides for an
overall credit limit of $5,000,000 and expires in January, 1999.  Interest is
payable monthly at prime, or an Offshore Rate plus 1.5%.  The credit facility
provides for the issuance of letters of credit not to exceed $5,000,000.  The
revolving credit agreement contains certain financial covenants with which the
Company was not in compliance as of May 31, 1998.  At May 31, 1998, there were
no amounts borrowed under this agreement.  A $1,900,000 standby letter of credit
was issued to support a loan from a Japanese bank, that has a balance of
$1,428,571 as of May 31, 1998, to Unit Instruments Japan Inc., a subsidiary of
the Company.  Subsequent to May 31, 1998, the Company repaid its borrowing from
the Japanese Bank on July 15, 1998 and canceled the outstanding letter of
credit.  Additionally, the Company terminated its revolving credit agreement
with the bank on July 29, 1998.

                                      19
<PAGE>
 
     The Company's financial position remains strong.  As of May 31, 1998, the
Company had $9,942,000 in cash and no long-term debt.  The Company expects that
current cash balances and anticipated cash flow from operations will be adequate
to meet its near-term financing needs.


FORWARD-LOOKING STATEMENTS

This annual report on Form 10-K contains certain forward-looking statements made
in good faith by the Company pursuant to the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995. In connection with these "safe
harbor" provisions, the Company identifies important factors that could cause
actual results to differ materially from those contained in any forward-looking
statements made by, or on behalf of, the Company.  Any such statements are
qualified by reference to the following cautionary statements.

The Company's businesses operate in a highly competitive market and are subject
to many risks and uncertainties.  Such risks and uncertainties include, but are
not limited to, the Company's dependence on a few large customers, the Company's
dependence on the semiconductor market, which is subject to cyclicality and
periodic fluctuations in demand, current economic and financial conditions in
Asia and, in particular, Korea, the magnitude and duration of the current
industry downturn, the successful development and industry acceptance of new
products, failure to gain or maintain market share, the replacement of the
Company's products with new technology, pricing pressures, the potential change
in competitive conditions within the markets served by the Company, expenses for
the extended product warranties, industry consolidation, the failure to retain
key technical and management personnel, adverse changes in the Company's
operations or businesses, failure to diversify into markets other than the
semiconductor equipment market, failure to reduce product costs, failure to
commercialize the Z-Bloc(TM) gas distribution system and failure to anticipate
demand for the Company's products.

Although the Company believes that the assumptions underlying the forward-
looking statements are reasonable, any of the assumptions could prove inaccurate
and, therefore, there can be no assurance that the results contemplated in
forward-looking statements will be realized.  In addition, the business and
operations of the Company are within a single industrial segment and are
dependent on a few large customers.  This concentration on a single market and
limited customer base subjects the Company to substantial risks, which increases
the uncertainty inherent in such forward-looking statements.  In light of the
significant uncertainties inherent in the forward-looking information included
herein, the inclusion of such information should not be regarded as a
representation by the Company, or any other person, that the objectives or plans
for the Company will be achieved.

                                      20
<PAGE>
 
ITEM. 8  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


                       REPORT OF INDEPENDENT ACCOUNTANTS



To the Board of Directors and Shareholders of Unit Instruments, Inc.


  In our opinion, the consolidated financial statements listed in the index
appearing under Item 14 (a) (1) and (2) on page 55 present fairly, in all
material respects, the financial position of Unit Instruments, Inc. and its
subsidiaries at May 31, 1998 and 1997, and the results of their operations and
their cash flows for each of the three years in the period ended May 31, 1998,
in conformity with generally accepted accounting principles.  These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits.  We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement.  An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation.  We
believe that our audits provide a reasonable basis for the opinion expressed
above.

 


PricewaterhouseCoopers LLP
Costa Mesa, California
July 17, 1998

                                      21
<PAGE>
 
<TABLE>
<CAPTION>
                                                     UNIT INSTRUMENTS, INC.
                                                  CONSOLIDATED BALANCE SHEETS
                                                     MAY 31, 1998 AND 1997
                                           (amounts in thousands, except share data)

                                                                                         1998                           1997
                                                                                        -----                          -----
<S>                                                                                      <C>                            <C> 
Assets:                                                                                                      
Current assets:                                                                                              
  Cash and cash equivalents                                                           $ 9,942                        $12,203
  Accounts receivable, less reserves of $135 in 1998 and $149 in 1997                   6,529                          7,032
  Inventories (Note 3)                                                                  7,638                          8,700
  Income taxes refundable (Note 6)                                                        735                          1,523
  Prepaid expenses and other                                                              277                            322
  Deferred taxes                                                                        1,114                          1,333
                                                                                      -------                        -------
Total current assets                                                                   26,235                         31,113
Fixed assets, net (Note 4)                                                              8,477                         10,149
Goodwill, net of accumulated amortization of $2,027 in 1998                                                  
     and $2,275 in 1997                                                                 4,034                          8,577
Deferred income taxes                                                                     255                             --
Other assets                                                                            1,102                          1,125
                                                                                      -------                        -------
Total                                                                                 $40,103                        $50,964
                                                                                      =======                        =======
                                                                                                             
LIABILITIES AND SHAREHOLDERS' EQUITY                                                                         
Current liabilities:                                                                                         
  Accounts payable                                                                    $ 1,642                        $ 2,290
  Accrued compensation and benefits                                                       994                          1,113
  Current installments on term debt (Note 5)                                            1,438                          1,740
  Other current liabilities                                                             2,439                          2,274
                                                                                      -------                        -------
    Total current liabilities                                                           6,513                          7,417
Deferred income taxes                                                                      --                            203
Other long-term liabilities and deferred credits                                          580                            683
                                                                                      -------                        -------
Total                                                                                   7,093                          8,303
                                                                                      -------                        -------
Commitments and contingencies  (Notes 7, 11 and 12)                                                          
Shareholders' equity:                                                                                        
  Common stock, $.15 par value; authorized shares: 12,000,000;                                               
      issued shares: 3,995,118 in 1998 and 4,384,627 in 1997                              599                            658
  Additional paid-in capital                                                           21,972                         23,211
  Retained earnings                                                                    11,010                         19,280
  Foreign currency translation adjustment                                                (571)                          (488)
                                                                                      -------                        -------
    Total shareholders' equity                                                         33,010                         42,661
                                                                                      -------                        -------
                                                                                      $40,103                        $50,964
                                                                                      =======                        =======
 
</TABLE> 

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

                                      22
<PAGE>
 
                            UNIT INSTRUMENTS, INC.
                     CONSOLIDATED STATEMENT OF OPERATIONS
            FOR THE FISCAL YEARS ENDED MAY 31, 1998, 1997 and 1996
                   (amounts in thousands, except share data)
 
<TABLE> 
<CAPTION> 
<S>                                                                      <C>                            <C>               <C> 
                                                                           1998                          1997              1996
                                                                          -----                         -----             -----
Net sales                                                             $  52,234                     $  43,271         $  65,568
Operating costs and expenses:
  Cost of goods sold                                                     36,141                        33,582            39,501
  Selling and administration                                             12,091                        12,337            14,587
  Restructuring costs                                                     4,931                           558               373
  Research, development and engineering                                   4,533                         4,035             3,757
                                                                      ---------                     ---------         ---------
    Operating income (loss)                                              (5,462)                       (7,241)            7,350
Interest income                                                             735                           822               690
Interest expense                                                           (115)                         (148)             (112)
Other income (expense), net                                                (441)                           39              (132)
                                                                      ---------                     ---------         ---------
Income (loss) from continuing operations                                 (5,283)                       (6,528)            7,796
Provision for (benefit from) income taxes                                  (634)                       (2,220)            3,018
                                                                      ---------                     ---------         ---------
 
Income (loss) from continuing operations                                 (4,649)                       (4,308)            4,778
Discontinued operations:
   Income, net of income tax provision of $521                               --                            --               750
   Gain on disposal, including tax provision of $1,011                       --                            --             1,454
                                                                      ---------                     ---------         ---------
Net income (loss)                                                     $  (4,649)                    $  (4,308)        $   6,982
                                                                      =========                     =========        ==========
 
Basic net income (loss) per common share:
  Income (loss) from continuing operations                            $   (1.08)                    $  (0.99)         $    1.16
  Discontinued operations:
    Net income                                                               --                            --              0.18
    Gain on disposal                                                         --                            --              0.35
Net income (loss)                                                     $   (1.08)                    $   (0.99)        $    1.69
                                                                      =========                     =========        ==========
Average shares used in computing earnings per share                   4,295,000                     4,375,000         4,125,000
                                                                      =========                     =========         =========
 
Diluted net income (loss) per common share:
  Income (loss) from continuing operations                            $  (1.08)                     $  (0.99)         $   1.09 
  Discontinued operations:
    Net income                                                              --                           --               0.17
    Gain on disposal                                                        --                           --               0.33
                                                                      ---------                     ---------         ---------
Net income (loss)                                                     $  (1.08)                     $  (0.99)         $   1.59
                                                                      =========                     =========         =========
Average shares used in computing earnings per share                   4,295,000                     4,375,000         4,393,000
                                                                      =========                     =========        ==========
 
</TABLE> 
The accompanying notes are an integral part of the consolidated financial 
statements.

                                      23
<PAGE>
 
                            UNIT INSTRUMENTS, INC.
                CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
            FOR THE FISCAL YEARS ENDED MAY 31, 1998, 1997 AND 1996
                            (amounts in thousands)
 
<TABLE> 
<CAPTION>                                                                               FOREIGN
                               COMMON    COMMON       ADDITIONAL                        CURRENCY
                               STOCK     STOCK         PAID-IN          RETAINED       TRANSLATION        TREASURY
                               SHARES    ISSUED        CAPITAL          EARNINGS       ADJUSTMENT          STOCK        TOTAL
                               ------    ------       ----------        --------       -----------        --------    ----------
<S>                            <C>        <C>          <C>              <C>            <C>                <C>        <C> 
Balance at May 31, 1995         4,416     $662          $ 20,413         $ 18,171      $  (252)      $  (516)       $ 38,478
    Net income                                                              6,982                                      6,982
    Dividends                                                                (258)                                      (258)
    Exercise of stock              
     options                       67        10               386                                                        396
    Purchase of common           
     stock                       (220)      (33)           (1,330)          (1,222)                                   (2,585)
    Tax benefit from                                          268                                                        268
     stock options
    Retirement of                
     treasury stock              (173)      (26)             (490)                                        516             --
    Foreign currency             
     translation                                                                           (57)                          (57)
                                ------     ----         ---------        ---------     --------      --------       --------      
Balance at May 31, 1996         4,090       613            19,247           23,673        (309)             --        43,224
 
    Net (loss)                                                             (4,308)                                    (4,308)
    Issuance of common            
     stock                        289        43             3,934                                                      3,977
    Exercise of stock             
     options                       58        10               326                                                        336
    Purchase of common            
     stock                        (52)       (8)            (356)            (85)                                       (449)
    Tax benefit from           
     stock options                                            60                                                          60
    Foreign currency                                                                      
     translation                                                                          (179)                         (179)
                                 -------    ----         --------         --------      --------      --------       ------- 
Balance at May 31, 1997          4,385      658           23,211           19,280         (488)             --        42,661

    Net (loss)                                                             (4,649)                                    (4,649)
    Exercise of stock              
     options                       129       19              804                                                         823
    Purchase of common           
     stock                        (519)     (78)          (2,343)          (3,621)                                    (6,042)
    Tax benefit from                                         
     stock options                                           300                                                         300
    Foreign currency
     translation                                                                           (83)                          (83)
                                --------   ----         --------         --------      --------      --------       --------     

Balance at May 31, 1998          3,995     $599          $21,972          $11,010         $(571)      $              $33,010
                                ========   ====          =======          =======        =======       ========      ========
</TABLE>

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

                                      24
<PAGE>
 
                       UNIT INSTRUMENTS, INC.
                CONSOLIDATED STATEMENT OF CASH FLOWS
       FOR THE FISCAL YEARS ENDED MAY 31, 1998, 1997 AND 1996
                        (amounts in thousands)
<TABLE>
<CAPTION>
                                                                        1998                1997               1996
                                                                   --------------      --------------      ------------
<S>                                                                     <C>                 <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net income (loss)                                                   $(4,649)            $(4,308)          $ 6,982
     Adjustments to reconcile net income (loss) to net cash
     provided from operating activities:
     Depreciation and amortization                                         2,772               3,145             2,023
     Deferred income taxes                                                  (239)                110              (180)
     Loss (gain) on disposal of property, plant and equipment                479                  (1)               --
     Gain on sale of business                                                 --                  --            (1,454)
     Write-off of goodwill                                                 4,125                  --                --
     Changes in assets and liabilities, net of effect of
        businesses sold and acquired:
     Accounts receivable                                                     503               4,507              (636)
     Inventories                                                           1,062               2,884            (1,269)
     Prepaids and other assets                                                14                 (69)              249
     Accounts payable and accrued compensation and benefits                 (767)             (1,856)             (944)
     Income taxes                                                            788              (2,956)              469
     Other current liabilities                                               165                (162)           (1,421)
     Other                                                                  (103)                 34               126
                                                                         --------            --------         ---------
Net cash flow provided from operating activities                           4,150               1,328             3,945
CASH FLOWS FROM INVESTING ACTIVITIES:
     Capital expenditures                                                 (1,192)             (1,366)           (5,182)
     Proceeds from sale of property, plant and equipment                      85                  16                --
     Proceeds from sale of business                                           --                  --            12,526
     Note receivable from sale of business                                    --                  --              (750)
     Change in short-term investments                                         --                  --             4,919
     Issuance of note receivable                                              --                  --            (1,025)
     Net cash paid for acquired business                                      --              (1,127)               --
     Other                                                                    --                  --               (67)
                                                                         --------            --------         ---------        
Net cash provided from (used in) investing activities                     (1,107)             (2,477)           10,421
CASH FLOWS FROM FINANCING ACTIVITIES:
     Payments on long-term debt                                               --                (254)             (453)
     Change in short-term borrowings                                        (302)               (734)           (1,311)
     Cash dividends paid                                                      --                  --              (517)
     Purchase of company common stock                                     (6,042)               (449)           (2,585)
     Stock option exercise, related tax benefits and other                 1,123                 396               664
                                                                                
                                                                         --------            --------         --------- 
Net cash (used in) financing activities                                   (5,221)             (1,041)           (4,202)
Effect of exchange rate changes on cash and cash equivalents:                (83)               (179)              (57)
                                                                         --------            --------         ---------           
 
Net increase (decrease) in cash and cash equivalents                      (2,261)             (2,369)           10,107
Cash and cash equivalents at beginning of year                            12,203              14,572             4,465
                                                                         --------            --------         ---------
Cash and cash equivalents at end of year                                 $ 9,942             $12,203           $14,572
                                                                         --------            --------         ---------           
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
     Interest paid                                                       $    75             $    59           $   112
     Net (refunds) or payments of income taxes                           $(1,482)            $   567           $ 4,493
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.

                                      25
<PAGE>
 
                             UNIT INSTRUMENTS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                        


For the Year Ended May 31, 1998


1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BUSINESS
--------

  The Company primarily designs, manufactures and markets mass flow controllers
that are used to control and measure the flow of process gases in the
fabrication of semiconductor wafers.

PRINCIPLES OF CONSOLIDATION
---------------------------

  The consolidated financial statements include the accounts of Unit
Instruments, Inc. and its wholly-owned subsidiaries (the "Company").
Significant intercompany accounts and transactions have been eliminated.

FISCAL YEAR
-----------

  The Company began ending its fiscal year on the Saturday closest  to May 31st
effective fiscal year 1996.  Therefore,  the last three fiscal years ended on
May 30, 1998, May 31, 1997 and June 1, 1996.  For clarity of presentation, all
years are reported as ending on May 31st.

CASH AND CASH EQUIVALENTS
-------------------------

  The Company considers all highly liquid investments with a maturity of three
months or less at the time of purchase to be cash equivalents.

INVENTORY VALUATION
-------------------

  Inventories are valued at lower of cost (first-in, first-out) or market.

FIXED ASSETS, DEPRECIATION AND AMORTIZATION
-------------------------------------------

  The Company computes depreciation using the straight-line method over the
estimated useful lives of the related assets or the remaining lives of the
related leases (three to ten years), whichever is shorter.  Repairs and
maintenance are charged to expense as incurred.  Major renewals and betterments,
which extend the useful life of the related asset, are capitalized.  Asset

                                      26
<PAGE>
 
values are recorded at original cost.

RESEARCH AND DEVELOPMENT
------------------------

  Research and development costs are expensed in the period incurred.

WARRANTY RESERVE
----------------

  The Company generally provides customers with a limited one to three-year
warranty.    In addition, the Company has one end user customer to which it has
issued a ten-year warranty in conjunction with its exclusive supplier agreement.
The liability for future warranty claims reflects the estimated future cost of
warranty repairs on products previously sold.  The Company recognizes the
estimated cost of warranty obligations at the time the related products are sold
and periodically evaluates and adjusts the warranty reserve to the extent actual
warranty experience varies from original estimates.

INTANGIBLE ASSETS
-----------------

  Intangible assets are recorded at cost and amortized over their estimated
useful lives using the straight-line method.  Goodwill represents the excess of
cost over the fair market value of assets acquired and is amortized using the
straight line method over the estimated useful lives which range between twelve
and forty years.  The Company regularly reviews the realizability of goodwill
and recognizes, on a current basis, any material impairment in the carrying
value of goodwill.

FOREIGN CURRENCY TRANSLATION
----------------------------

  The accounts of foreign subsidiaries are measured using local currencies as
the functional currency, except for Unit Instruments Ltd., an Irish corporation,
which maintains its accounts in U.S. dollars.  Assets and liabilities are
primarily translated from such foreign currencies into U.S. dollars at period-
end exchange rates and income and expense accounts are translated at average
monthly exchange rates.  Net gains or losses resulting from the translations are
excluded from the income and loss accounts and applied to a separate component
of shareholders' equity.  Gains and losses from foreign currency transactions
are reported in the other income (expense) category of the Statement of
Operations.

REVENUE RECOGNITION
-------------------

  Product sales are recorded at the time of shipment and service revenues are
recorded when the related services are performed.

                                      27
<PAGE>
 
INCOME TAXES
------------

  The Company accounts for income taxes using the asset and liability method in
accordance with Financial Accounting Standards No. 109, "Accounting for Income
Taxes."

EARNINGS PER SHARE
------------------

  In February 1997, the Financial Accounting Standards Board issued Statement on
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128").  SFAS
128 requires dual presentation consisting of Basic Earnings per Share ("Basic
EPS") and Diluted Earnings per Share ("Diluted EPS").  Basic EPS includes no
dilution and is computed by dividing income available to common stockholders by
the weighted-average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution of securities that could share in
the earnings of an entity.  SFAS 128 is effective for financial statements
issued for periods ending after December 15, 1997, including interim periods.
Accordingly, the Company adopted SFAS 128 in the third quarter of fiscal 1998.
Earnings per share for prior period have been restated in accordance with SFAS
128.
 
  Diluted EPS was the same as Basic EPS for fiscal 1998 and fiscal 1997 due to
the net loss realized.  Fiscal 1996 Diluted EPS includes 268,000 in common share
equivalents, assuming the exercise of stock options.

                                      28
<PAGE>
 
The following table summarizes the calculation of basic and diluted earnings per
     share:

<TABLE>
<CAPTION>

<S>                                                  <C>                 <C>              <C>
Years Ending May 31                                        1998               1997            1996
--------------------------------------------------   -----------------   --------------   -------------
 
Net income (loss) available to common
shareholders from continuing operations                       $(4,649)         $(4,308)          $4,778
 
Net income available to common shareholders
from discontinued operations                                       --               --            2,204
                                                              -------          -------           ------
                                                              $(4,649)         $(4,308)          $6,982
Net income (loss) available to common
shareholders

Basic earnings (loss) per share:
Weighted average number of shares
outstanding                                                     4,295            4,375            4,125
 
Net income (loss) from continuing
operations per share                                            (1.08)           (0.99)            1.16
 
Net income from discontinued
operations per share                                               --               --             0.53
                                                                                               
Net loss per share                                            $ (1.08)         $ (0.99)          $ 1.69
                                                              =======          =======           ======
 
Diluted earnings (loss) per share:
Weighted average number of shares
outstanding                                                     4,295            4,375            4,125
 
Common share equivalents, assuming
exercise of stock options and warrants                             --               --              268
 
Average shares used in computing
earnings per share                                              4,295            4,375            4,393
 
Net income (loss) from continuing operations
per share                                                       (1.08)           (0.99)            1.09
 
Net income from discontinued operations
per share                                                          --              --             0.50
                                                                                                 ------
Net loss per share                                            $ (1.08)         $ (0.99)          $ 1.59
                                                              =======          =======           ======
</TABLE>
        
                                      29
                               
<PAGE>
 
FAIR VALUE OF FINANCIAL INSTRUMENTS
-----------------------------------

  The carrying amounts of cash and cash equivalents, accounts and other
receivables, accounts payable, accrued liabilities and debt approximate fair
value because of the short maturity of these instruments.

IMPAIRMENT OF LONG-LIVED ASSETS
-------------------------------

  Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of"
("SFAS 121"), establishes accounting standards for the impairment of long-lived
assets to be reviewed whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable.  Under the provisions of
SFAS 121, companies are required to review the recoverability of long-lived
assets and intangible assets by comparing cash flows on an undiscounted basis to
the net book value of the assets.  In the event the projected and undiscounted
cash flows are less than the net book value of the assets, the carrying values
of the assets are written down to their fair value, less cost to sell.  In
addition, SFAS 121 requires that assets to be disposed of be measured at the
lower of cost or fair value, less cost to sell.  In fiscal 1998, the Company
recorded an impairment of a long lived asset.  The impairment related to
goodwill recorded in the purchase accounting of the acquisition of Control
Systems, Inc. on June 3, 1996.

ACCOUNTING FOR STOCK-BASED COMPENSATION
---------------------------------------

  In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), which establishes financial accounting and reporting
standards for stock-based employee compensation.  Under SFAS 123, companies are
encouraged, but not required, to adopt a method of accounting for stock
compensation awards based upon the estimated fair value at the date the
options/awards are granted as determined through the use of a pricing model (the
"Fair Value Method").  Companies continuing to account for such awards in
accordance with the existing guidance of Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25), have to disclose, in
the Notes to Financial Statements, the pro forma impact on net income and net
income per share had the Company utilized the Fair Value Method.  The Company
accounts for stock compensation awards in accordance with APB 25 with the
appropriate footnote disclosure required under SFAS 123.

USE OF ESTIMATES
----------------

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

                                      30
<PAGE>
 
RECLASSIFICATIONS
-----------------

  Certain items in the fiscal 1997 and 1996 financial statements have been
reclassified to conform to the fiscal 1998 presentation.

NEW ACCOUNTING PRONOUNCEMENTS
-----------------------------

  In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"), which will become effective for the Company in fiscal 1999.  The Company
does not expect the adoption of SFAS 130 to have a material impact on its
financial condition or results of operations.

  In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"), which will become effective
for the Company in fiscal 1999.  SFAS 131 establishes standards for the way
publicly-held companies report information about operating segments, as well as
disclosures about products and services, geographic areas and major customers.
The Company does not expect the adoption of SFAS 131 to have a material impact
on its financial condition or results of operations.


2.  RESTRUCTURING CHARGES AND DISCONTINUED OPERATIONS

  On June 3, 1996, the Company acquired Control Systems, Inc. ("CSI") for cash
and stock valued at $5,177,000.  Due to a severe business downturn, the Company
restructured the CSI business and other related operations.

     During the third quarter of fiscal 1998, the Company approved a
restructuring plan that included the closure of the CSI Rio Rancho, New Mexico
manufacturing and administrative facility. Operations and administrative
functions for the Rio Rancho facility were transferred to the Chandler, Arizona
facility and the Yorba Linda, California corporate office, respectively.  The
intent of the restructuring was effected to lower the cost of operations of
high-purity gas systems production and to improve efficiency by centralizing
certain administrative and marketing functions.

     The categories of costs included in the restructuring charge are as
follows:
<TABLE>
<CAPTION>
 
<S>                                                  <C>
     Severance and other employee related costs       $  288,000
     Facility closure costs                              136,000
     Impairment of CSI goodwill                        4,125,000
     Fixed asset disposition and write-off               382,000
                                                      ----------
 
     Total restructuring costs                        $4,931,000
                                                      ==========
</TABLE>

                                      31
<PAGE>
 
     Thirteen employees were terminated as a result of the restructuring,
including two officers of the Company, resulting in a charge of $288,000, of
which $135,000 has been paid and $153,000 is recorded as a current liability as
of fiscal year end.

     The Rio Rancho facility is no longer utilized, except for a few engineering
employees and a sales representative who temporarily remain at the facility.
Costs to maintain the facility and remove the leasehold improvements were
accrued in the third quarter in the amount of $136,000.  As of  May 31, 1998,
$95,000 of this accrual remains as a current liability.  The Company is looking
for a tenant to sublease the building or to arrange to terminate the lease in
exchange for providing the lessor with a new lessee.  The lease of the Rio
Rancho facility expires on December 31, 1998.

     Due to the decline in expected sales volume of high-purity gas systems, and
a curtailment of product offerings, management has determined, in accordance
with Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived to Be Disposed of" ("SFAS
121") that an asset impairment exists.   Management has determined that future
undiscounted cash flows from the high-purity gas system business are not
sufficient enough to recover the carrying value of the related goodwill over its
remaining life of approximately 10 years.  Therefore, the Company determined
that the high-purity gas system related goodwill, with a remaining unamortized
carrying value of $4,125,000, is fully impaired and has written-off the entire
carrying amount of such goodwill.  No tax deduction is allowed for this goodwill
write-off.

     The fixed assets of the CSI Rio Rancho facility that are useable were
relocated to Yorba Linda or Chandler.  The fixed assets that were not useable or
removable were written-off in the amount of $382,000.

     During fiscal 1997, a restructuring charge of $558,000 was incurred for
severance related costs associated with the consolidation of the Tempe, Arizona
service center into the Chandler, Arizona facility.

  On September 22, 1995, the Company sold the assets of its Autoclave Engineers
Group ("AEG") located in Erie, Pennsylvania to Snap-tite, Inc. for consideration
of $16,250,000, consisting of $15,500,000 of cash and an interest bearing five-
year promissory note for $750,000.  The assets purchased by Snap-tite, Inc.
included all the outstanding stock of Autoclave Engineers Canada Ltd. and
Autoclave Engineers, France, which were wholly-owned subsidiaries of AEG.  The
sale of AEG resulted in an after tax gain of $1,454,000, and income from AEG
operations during fiscal year 1996 resulted in an after tax net income of
$750,000.  These amounts are reported as discontinued operations in the
accompanying Statement of Operations.

                                      32
<PAGE>
 
  Subsequent to the sale of AEG, Autoclave Engineers, Inc., the former parent of
Unit Instruments, Inc. ("Unit"), merged into Unit resulting in Unit becoming the
surviving corporation and reporting Company.  With the disposition of AEG, the
continuing operations of the Company represent a single business segment.

 
3.  INVENTORIES

    Inventories at May 31, 1998 and 1997 consist of the following:

<TABLE>
<CAPTION>
                                                       1998                       1997
                                               --------------------        -------------------
<S>                                            <C>                         <C>
    Raw materials                                    $6,029,000                 $6,701,000
    Work in process                                     839,000                  1,058,000
    Finished goods                                      770,000                    941,000
                                                     ----------                 ----------
Total                                                $7,638,000                 $8,700,000
                                                     ==========                 ==========
</TABLE>
                                                                                
4.  FIXED ASSETS
    Fixed assets at May 31, 1998 and 1997 were comprised of the following:

<TABLE>
<CAPTION>
                                                        1998                      1997
                                                ---------------------       ----------------
<S>                                                     <C>                         <C>
    Buildings and improvements                     $  5,422,000                $ 5,046,000
    Machinery and equipment                          13,601,000                 14,644,000
    Construction-in-progress                            146,000                    226,000
                                                   ------------                -----------
                                                     19,169,000                 19,916,000
 
Accumulated depreciation and amortization           (10,692,000)                (9,767,000)
                                                   ------------                -----------
Total                                              $  8,477,000                $10,149,000
                                                   ============                ===========
</TABLE>
                                        

5.  DEBT

      The Company has a revolving credit line with a bank which provides for an
overall credit limit of $5,000,000 and expires in January, 1999.  Interest is
payable monthly at prime or an Offshore Rate plus 1.50%.  The credit facility
provides for the issuance of letters of credit not to exceed $5,000,000.  At May
31, 1998, there were no amounts borrowed under this agreement, but a $1.9
million standby letter of credit was issued to support a loan from a Japanese
bank, which had a balance of $1,428,000 as of May 31, 1998, to Unit Instruments,
Japan.  The revolving credit agreement contains certain financial covenants with
which the Company was not in compliance at May 31, 1998.

                                      33

<PAGE>
 
     Subsequent to May 31, 1998, the Company repaid its borrowing from the
Japanese Bank on July 15, 1998 and canceled the outstanding letter of credit.
Additionally, the Company terminated its revolving credit agreement with the
bank on July 29, 1998.

Term debt as of May 31, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
                                                          1998                    1997
----------------------------------------------------------------------------------------------
 
<S>                                               <C>                     <C>
Bank term loan, payable quarterly and                      $ 1,428,000             $ 1,701,000
  renewable annually at interest rates from
  1.6% to 2.0%, secured by a standby letter
  of credit.
Capital lease obligations                                          -0-                  88,000
Other                                                           10,000                   9,000
                                                           -----------             -----------
Total                                                        1,438,000               1,798,000
Less current maturities                                     (1,438,000)             (1,740,000)
                                                           -----------             -----------
Long-term debt                                             $       -0-             $    58,000
                                                           ===========             ===========
</TABLE>
                                        
6.   INCOME TAXES

     The composition of the provision (benefit) for income taxes included in the
consolidated statement of operations was as follows:
<TABLE>
<CAPTION>
                                                     1998                  1997                   1996
                                                   -----------          -----------            -----------
Continuing operations:
<S>    <C>                                         <C>                   <C>                    <C>
       Current provision (benefit):
       Federal                                      $(795,000)          $(2,294,000)            $2,728,000
       State                                           20,000              (142,000)               126,000
       Foreign                                         80,000                46,000                 76,000
                                                    ---------           -----------             ----------
                                                     (695,000)           (2,390,000)             2,930,000
       Stock option exercise tax benefit
       applied to additional paid in capital          300,000                60,000                268,000
       Deferred
       Federal                                        166,000               496,000               (149,000)
       State                                         (405,000)             (386,000)               (31,000)
                                                    ---------           -----------             ----------
                                                     (239,000)              110,000               (180,000)
Total provision - continuing operations             $(634,000)          $(2,220,000)            $3,018,000
                                                    =========           ===========             ==========
 
Discontinued operations:
       Current                                             --                    --              1,835,000
       Deferred                                            --                    --               (303,000)
Total provision - discontinued operations                  --                    --             $1,532,000
                                                    =========           ===========             ==========
Total tax provision (benefit)                       $(634,000)          $(2,220,000)            $4,550,000
                                                    =========           ===========             ==========
</TABLE>


                                      34
<PAGE>
 
     A reconciliation of the federal statutory rate to the effective rate on
income from continuing operations is as follows:
 
<TABLE>
<CAPTION>
                                                         1998               1997             1996
                                                      -----------       -----------       ---------- 
<S>                                               <C>                <C>               <C>
Provision (benefit) at federal statutory rate         $(1,796,000)      $(2,219,000)      $2,651,000
State income tax net of federal benefit                  (215,000)         (341,000)         140,000
Goodwill amortization                                     142,000           187,000           52,000
Goodwill write-off                                      1,403,000                --               --
Effect of utilized foreign tax credits                         --                --          (79,000)
Foreign tax rate higher than U.S. rate                     95,000           253,000          175,000
Research tax credit                                      (295,000)         (230,000)              --
Other                                                      32,000           130,000           79,000
                                                      -----------       -----------       ----------
Total adjustments                                       1,162,000            (1,000)         367,000
                                                      -----------       -----------       ----------
Total provision (benefit) for income taxes            $  (634,000)      $(2,220,000)      $3,018,000
                                                      ===========       ===========       ==========
</TABLE>

        Temporary differences arising from continuing operations between the
financial basis and tax basis of assets and liabilities result in deferred
income taxes.  Deferred tax assets and liabilities consist of the following at
May 31, 1998 and 1997:

<TABLE>
<CAPTION>
                                                                      1998                     1997
                                                                  -----------              -----------
      Deferred tax assets:
<S>                                                             <C>                      <C>
        Inventory valuation                                       $   284,000              $   385,000
        Deferred compensation                                         207,000                  262,000
        Accrued expenses                                              303,000                  168,000
        Reserves                                                      547,000                  565,000
        State loss and credit carryovers                              918,000                  527,000
        Foreign tax loss and credit carryforward                    1,144,000                1,190,000
        Other                                                          95,000                       --
                                                                  -----------              -----------
      Total gross deferred tax assets                               3,498,000                3,097,000
      Valuation allowance                                          (1,144,000)              (1,190,000)
                                                                  -----------              -----------
      Net deferred tax assets                                       2,354,000                1,907,000
 
        Deferred tax liabilities:
        Tax over book depreciation                                   (621,000)                (690,000)
        Deferred state effect on federal deferred                    (323,000)                 (35,000)
        Other                                                         (41,000)                 (52,000)
                                                                  -----------              -----------
      Total deferred tax liabilities                                 (985,000)                (777,000)
 
      Net deferred tax asset                                      $ 1,369,000              $ 1,130,000
                                                                  ===========              ===========
</TABLE>

                                      35
<PAGE>
 
         A 100% valuation allowance of $1,144,000 has been provided against
deferred tax assets related to the utilization of foreign tax credits and
foreign loss carryforwards.  At May 31, 1998, the Company had foreign tax credit
carryforwards available for federal income tax purposes and foreign net
operating loss carryforwards of $323,000 and $1,643,000, respectively.  These
expire as follows:
 
<TABLE>
<CAPTION>
           Fiscal Year in Which                     Foreign                       Foreign
           Carryforwards Expires                   Tax Credits                Operating Losses
         ------------------------               -----------------            -------------------
 
<S>                                           <C>                           <C>
                 1999                                     --                    $  126,000
                 2000                                     --                            --
                 2001                               $321,000                       249,000
                 2002                                  2,000                       589,000
                 2003                                     --                       679,000
                                                    --------                    ----------
                                                    $323,000                    $1,643,000
                                                    ========                    ==========
</TABLE>
 
     As of May 31, 1998, the Company has available state net operating loss
carryforwards and state tax credit carryforwards applicable to several states.
A deferred tax asset has been recorded in the amount of $918,000 for the tax
benefit provided by these carryforwards.  These expire as follows:

<TABLE>
<CAPTION>
                         Fiscal Year in Which                     State
                         Carryforward Expires                   Tax Benefits
                       -----------------------               -----------------
<S>                            <C>                            <C>

                                 2002                            $311,000
                                 2003                              76,000
                                 2004                                  --
                             2005 and later                       531,000
                                                                 --------
                                                                 $918,000
                                                                 ========
</TABLE>


          The domestic and foreign components of income (loss) before provision
for income taxes for continuing operations are as follows:

<TABLE>
<CAPTION>
                                          1998                 1997                 1996
                                      -----------          -----------           ---------- 
<S>                             <C>                  <C>                  <C>
         US                           $(5,238,000)         $(5,913,000)          $8,087,000
         Foreign                          (45,000)            (615,000)            (291,000)
                                      -----------          -----------           ---------- 
         Total                        $(5,283,000)         $(6,528,000)          $7,796,000
                                      ===========          ===========           ==========
</TABLE>

  The cumulative amount of unrepatriated earnings of continuing foreign
subsidiaries and entities owned 20% or more, for which no deferred taxes have
been provided, is $1,333,000 at May 31, 1998.  It is the Company's intention to
reinvest undistributed earnings of certain of its foreign subsidiaries and
thereby indefinitely postpone their remittance.

                                      36

<PAGE>
 
7.  RETIREMENT PLANS

  The Company maintains a qualified profit sharing (401K) plan for substantially
all of its employees who meet certain age and length of service requirements.
Contributions equal to 50% of the participants' contributions are made by the
Company to the plan.  Additional contributions may be made by Unit, at the
discretion of Unit's Board of Directors.  Contributions to the plan were
$234,000 in 1998, $305,000 in 1997, and $486,000 in 1996.

  In addition, the Company maintains a supplemental retirement plan for one
current and five former executives with retirement benefits based upon certain
percentages of the employees' salaries.  At May 31, 1998 and 1997, the Company's
estimated liability for the plan, which has been included in other long-term
liabilities, was $524,000 and $533,000, respectively.

8.  STOCK OPTION PLANS

  The Company established a 1997 Stock Option Incentive Plan in fiscal 1998.
The plan allows the Company to grant up to a total of 480,000 shares of stock
options.  The options can be granted as either incentive stock options or non-
qualified stock options.  Under this plan, options are granted at a price not
less than the fair market value at the grant date and generally become
exercisable in five equal annual installments beginning one year after the grant
date.  Options expire ten years after the grant date.  Of the 480,000 shares
available, 170,000 were granted in fiscal 1998 and 15,000 were canceled.

  The Company also maintains a 1987 Stock Plan ("1987 Plan") under which key
employees may be awarded both non-qualified and qualified stock options not to
exceed 1,600,000 shares of the Company's Common Stock.  Under this plan, options
are granted at a price not less than the fair market value at the grant date and
generally become exercisable in five equal annual installments beginning one
year after the grant date.  Options expire ten years after the grant date.  Of
the total shares authorized for issuance, options for 1,023,560 shares have been
granted, net of cancellations, and 389,771 shares have been exercised.  No more
options will be issued under the 1987 Plan.

  The Company also maintains a 1990 Non-Employee Director Stock Option Plan
("1990 Plan") under which each non-employee director receives an automatic grant
of options on September 1st of each year.  The aggregate options available under
the 1990 Plan is not to exceed 250,000 shares of the Company's Common Stock.
Under this plan, options are granted at the fair market price on the grant date
and are completely vested.  Options expire ten years after the grant date.  Of
the total shares authorized, 108,941 have been granted, 12,823 have been
exercised, and 9,693 have been canceled, leaving a balance of 86,425 options
outstanding under the 1990 Plan as of May 31, 1998.

                                      37
<PAGE>
 
  At May 31, 1998, there were 365,753 shares exercisable under the 1987 Plan at
option prices ranging from $6.25 to $13.63 and 86,425 shares exercisable under
the 1990 Plan at option prices ranging from $7.00 to $15.38.  No options were
exercisable under the 1997 Plan as of May 31, 1998.

  The following is a summary of all stock option activity for fiscal 1998, 1997
and 1996:
<TABLE>
<CAPTION>
                                                                                        Weighted Average
                                                                                         Exercise Price
                                     Number of Shares          Price Per Share             Per Share
                                     ----------------          ---------------             ---------
<S>                                   <C>                       <C>                      <C>
May 31, 1995                              471,175              $ 4.95 - $11.25               $ 7.23
Exercised                                 (67,341)             $4.95 -   $8.00               $ 7.47
Granted                                   470,075              $12.63 - $15.38               $12.80
                                         --------
 
May 31, 1996                              873,909              $ 4.95 - $15.38               $10.34
Options canceled or expired               (80,000)             $13.63 - $13.75               $13.74
Exercised                                 (57,024)             $          5.89               $ 5.89
Granted                                   235,834              $ 9.00 - $13.75               $11.61
                                         --------
May 31, 1997                              972,719              $ 5.89 - $15.38               $10.63
Options canceled or expired              (149,243)             $ 5.89 - $15.38               $11.43
Exercised                                (129,306)             $ 5.89 - $11.02               $ 6.37
Granted                                   181,044              $ 7.88 - $13.63               $ 9.52
                                         --------
May 31, 1998                              875,214              $ 6.25 - $15.38               $10.89
                                         ========
</TABLE>

      The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock option plans.  Accordingly, no compensation cost has
been recognized for its stock option plans.  Had compensation cost been
determined based on estimated fair market value at the grant dates for awards
under those plans, in accordance with the method presented in SFAS 123, the
Company's net income (loss) and net income (loss) per share would have been as
follows:
<TABLE>
<CAPTION>
                                                                  Year Ended May 31
                                                                  -----------------
Continuing Operations                                 1998               1997              1996
---------------------                                 ----               ----              ----        
<S>                                                 <C>                  <C>               <C>
Net income (loss)
      As reported                                    $(4,649)          $(4,308)            $4,778
      Pro forma                                       (5,042)           (4,723)             4,481
Net income (loss) per share
      As reported - Basic                              (1.08)            (0.99)              1.16
      As reported - Diluted                            (1.08)            (0.99)              1.09

      Pro forma - Basic                                (1.17)            (1.08)              1.06
      Pro forma - Diluted                              (1.17)            (1.08)              1.00
</TABLE>

                                      38
<PAGE>

      The effects of applying SFAS 123 in the pro forma statements above are not
likely to be representative of the effects on pro forma net income for future
years because options vest over several years and additional awards generally
are made each year.

      The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model computed using the following
assumptions:

<TABLE>
<CAPTION>
                                                  1998                1997               1996
                                           -------------------   ---------------   ----------------
<S>                                        <C>                   <C>               <C>
Risk free interest rates                          5.90%             6.54%              6.46%
Expected lives                                  7 years             7 years            7 years
Expected volatility                               39%               32%                32%
Expected dividend yield                           none              none               none
</TABLE>

      The weighted average fair value of options granted during fiscal 1998,
1997 and 1996 was $4.86 per share, $5.19 per share and $6.20 per share,
respectively.  The weighted average exercise price per share of exercisable
options as of May 31, 1998, 1997 and 1996 was $10.91 per share, $9.15 per share,
and $8.19, respectively.  The quantities of exercisable shares as of May 31,
1998, 1997, and 1996 were 452,178; 486,494 and 453,419, respectively.

      The following table summarizes information about stock options outstanding
at May 31, 1998.
<TABLE>
<CAPTION>
                                        Weighted
                                         Average        Weighted                        Weighted
                                        Remaining        Average                         Average
     Range of            Number        Contractual      Exercise         Number         Exercise
 Exercise Prices      Outstanding         Life            Price        Exercisable        Price
------------------   --------------   -------------   -------------   -------------   -------------
<S>                  <C>              <C>             <C>             <C>             <C>
  $6.25 - $8.50             178,757             5.4          $ 7.67         121,757          $ 7.57
  $8.75 - $11.25            273,557             7.6           10.00         101,417           10.33
 $12.63 - $15.38            422,900             7.3           12.83         229,004           12.93
------------------          -------             ---          ------         -------          ------
  $6.25 - $15.38            875,214             7.0          $10.89         452,178          $10.91
</TABLE>


9.  EXPORT SALES AND CONCENTRATION OF CREDIT RISK

      Export sales amounted to $3,067,000, $2,018,000 and $3,720,000, or 6%, 5%
and 6% of total sales in 1998, 1997 and 1996, respectively.

      The Company generates revenues principally from sales of product to
customers in the semiconductor industry.  Accordingly, the Company's sales and
trade receivables are concentrated principally in this industry.  During 1998,
1997 and 1996, sales to one customer totaled $11,539,000, $10,826,000 and
$19,863,000, respectively, while sales to another customer totaled $3,468,000,
$4,755,000 and $12,909,000, respectively, for the same three fiscal years.

                                      39 
<PAGE>

10.  INDUSTRY SEGMENT INFORMATION

  The operations of the Company consist of one business segment which designs,
develops, manufactures, markets and services mass flow controllers and related
equipment, which are precision instruments sold principally to the semiconductor
industry to control and measure the mass flow rate of gases.

  The geographic distribution of sales, operating income and identifiable assets
is as follows:

<TABLE>
<CAPTION>
                                                              Year Ended May 31,
                                               ---------------------------------------------------
                                                    1998              1997               1996
                                                    ----              ----               ----
<S>                                                <C>                <C>               <C>
                                                         (amounts in thousands)
Net sales:
  United States                                     $45,582           $36,947            $58,063
  Europe                                              4,622             3,766              4,323
  Asia                                                3,030             2,558              3,182
                                                    -------           -------            -------
  Total                                             $52,234           $43,271            $65,568
                                                    =======           =======            =======
 
Income (loss) from operations:
  United States                                     $(5,756)          $(6,701)           $ 7,460
  Europe                                                342               (20)               133
  Asia                                                  (48)             (520)              (243)
                                                    -------           -------            -------
  Total                                             $(5,462)          $(7,241)           $ 7,350
                                                    =======           =======            =======
 
Identifiable assets:
  United States                                     $34,016           $44,503            $45,165
  Europe                                              3,059             3,556              4,134
  Asia                                                3,028             2,905              3,481
                                                    -------           -------            -------
  Total                                             $40,103           $50,964            $52,780
                                                    =======           =======            =======
</TABLE>


11.  OPERATING LEASES

      The Company leases manufacturing and office facilities at various
locations under non-cancelable operating leases expiring through 2006.

      Future minimum lease payments under non-cancelable operating leases (with
initial lease terms in excess of one year) as of May 31, 1998 are as follows:

                                      40 
<PAGE>

<TABLE>
<CAPTION>
                  Year ending May 31:
                  ------------------
<S>                                                  <C>
                        1999                         $1,286,000
                        2000                          1,164,000
                        2001                          1,087,000
                        2002                          1,031,000
                        2003                          1,009,000
                        Thereafter                    3,439,000

      Total rent expense for operating leases was as follows:

                        1996                         $1,410,000
                        1997                          1,413,000
                        1998                          1,434,000
</TABLE>


12.   CONTINGENCIES

      The Company has identified ground water and soil contamination at its
previously owned Erie, Pennsylvania operation of Autoclave Engineers Group.
These findings have been reported to the appropriate authorities and the Company
has established a reserve of $661,000 for estimated costs of further
investigation and potential remediation related to this matter.  In the opinion
of management, the final outcome of this matter will not have a material adverse
effect on the Company's financial position or results of operations.

      The predecessor to the Company, Autoclave Engineers, Inc., has been a
named co-defendant, along with numerous other companies, in several lawsuits in
state and federal courts in which plaintiffs allege personal injury from
exposure to asbestos-related products.  Autoclave manufactured marine steam
valves that may have contained some minor quantities of asbestos, but ceased the
production of these products several years ago.  The Company has product
liability insurance and has been successful in being dismissed from these types
of actions.  To date, the Company has not incurred any financial liability
related to asbestos litigation.  While it is not possible to predict future
asbestos-related claims, management of the Company, based upon available
information and the settlement history of similar litigation involving the
Company, believes that any future liability that may arise from these actions
will not have a material adverse effect on the consolidated financial condition
or results of operations of the Company.
 
      The Company has certain other actions pending that arise out of the
ordinary course of business.  In the opinion of management, the ultimate
resolution of the these matters will not have a material adverse impact on the
Company's financial position or results of operations.

                                      41 
<PAGE>

13.  RELATED PARTY TRANSACTIONS

      During fiscal 1998, the Company repurchased 412,215 shares of its common
stock for $5,049,634 ($12.25 per share), from James Levinson, a former director
and Chairman of the Board, and family members.  The Company also purchased Mr.
and Mrs. Levinsons' stock option contracts of 18,868 shares for $54,479.

      The Company entered into a Share Repurchase Agreement ("the Agreement") in
fiscal 1995 with its largest shareholder, the J & L Levinson Partnership ("the
Partnership"), of which James C. Levinson and Marilyn G. Levinson are the sole
partners.  Mr. Levinson is the Chairman of the Company's Board of Directors and
Mrs. Levinson was a member of the Board of Directors until her resignation in
September, 1995.  Under the Agreement, the terms of which were contingent upon
the closing of the sale of the assets of the Autoclave Engineers Group, the
Company repurchased 220,000 shares of the Common Stock of the Company from the
Partnership at a price of $11.75 per share, or approximately $2.6 million, on
September 22, 1995.


14.  ACQUISITION OF CONTROL SYSTEMS, INC.

      The Company acquired Control Systems, Inc. ("CSI") on June 3, 1996 in
exchange for $1.2 million in cash and 289,000 shares of Company common stock
valued at $3,977,000.  The excess of the purchase price over the net assets
acquired was approximately $4.8 million.  CSI fabricates high-purity gas
isolation boxes and gas panels for semiconductor manufacturers.  The acquisition
was accounted for by the purchase method.  Accordingly, the results of
operations of CSI are included with those of the Company for periods subsequent
to the date of acquisition.  CSI has converted to the Company's fiscal year.
See Note 2 for disclosure of CSI restructuring and the write-off of goodwill
during fiscal 1998.

      The unaudited pro forma combined results of operations of the Company and
CSI for the year ended May 31, 1996, after giving effect for certain pro forma
adjustments, is as follows:

<TABLE>
<S>                                                                    <C>
      Net sales                                                         $76,370,000
      Income from continuing operations                                   4,641,000
      Diluted income per share from continuing operations               $      0.99
</TABLE>

      The foregoing unaudited pro forma results reflect one year's amortization
of goodwill resulting from the acquisition of CSI. The Company determined that
the goodwill had an estimated 12-year life and, for purposes of the pro forma
adjustments, a 12-year amortization period was used.

                                      42 
<PAGE>

15.   SUBSEQUENT EVENTS

     On July 2, 1998, United States Filter Corporation ("U.S. Filter"), Kinetics
Acquisition Corp., a California corporation and wholly-owned subsidiary of U.S.
Filter ("Subcorp"), and  Unit Instruments, Inc. ("Unit") executed an Agreement
and Plan of Merger whereby Subcorp will be merged with and into Unit (the
"Merger") and Unit will survive the merger (the "Surviving Corporation") and
become a wholly-owned subsidiary of U.S. Filter.

          Pursuant to the terms of the Agreement and Plan of Merger, U.S. Filter
had a 30-day period, ending on July 31, 1998, to complete due diligence.  On
July 31, 1998, U.S. Filter notified Unit that it was dissatisfied with certain
items relating to the Company that resulted from their due diligence review,
including the declining prospects for the Company and its business due to the
deteriorating fundamentals in the semiconductor equipment market, and indicated
that they intended to terminate the Agreement and Plan of Merger unless these
items were cured or resolved to U.S. Filter's satisfaction within 30 days.  On
August 5, 1998, U.S. Filter and Unit agreed to amend the terms of the Agreement
and Plan of Merger and executed the First Amendment to the Agreement and Plan of
Merger, collectively ("the Merger Agreement").  With the execution of the First
Amendment, U.S. Filter has agreed that their due diligence condition has been 
satisfied, except for the requirement that Needham & Company, Inc. ("Needham")
terminate certain registration rights associated with a warrant held by Needham
for 100,000 shares of the Company's common stock.

          On July 7, 1998, Unit filed Form 8-K which summarized the Agreement
and Plan of Merger and included a complete copy of the Agreement and Plan of
Merger.  Included with Unit's Form 10-K, for the period ending May 31, 1998, is
Exhibit 10.14, First Amendment to the Agreement and Plan of Merger, dated August
5, 1998.  The below-referenced summary of the terms of the Merger Agreement is
qualified in its entirety by reference to the full text of the Agreement and
Plan of Merger and to First Amendment to the Agreement and Plan of Merger.

     Upon the effectiveness of the Merger, each outstanding share of common
stock, par value $0.15 per share ("Common Stock"), of Unit, with the exception
of shares held by shareholders who properly exercise dissenters' rights under
the Corporations Code of the State of California, will be converted into a
number of shares of U.S. Filter's common stock equal to the Exchange Ratio (as
defined below), collectively, the "Merger Consideration."

     The exchange ratio (the "Exchange Ratio") will be calculated as follows:
(a) if the average daily closing price (the "Average Closing Price") on the New
York Stock Exchange of U.S. Filter's common stock during the 20 consecutive
trading days ending five days prior to the Closing Date is above $26.00, the
Exchange Ratio will be equal to $11.03 divided by the Average Closing Price; and
(b) if the Average Closing Price is equal to or less than $26.00, the Exchange
Ratio will be equal to $11.03 divided by $26.00. If the Average Closing Price is
less than $24.00, Unit may terminate the Merger Agreement.

                                      43 
<PAGE>

     The closing of the Merger is subject to certain conditions, but not limited
to, the termination of certain registration rights held by Needham, expiration
of the Hart-Scott-Rodino waiting period, and approval by Unit shareholders.  The
transaction is expected to close in October, 1998.  Following the merger, Unit
will become a wholly-owned subsidiary within U.S. Filter's Kinetics Group ("USF
Kinetics").

     At the effective time (the "Effective Time"), each outstanding stock option
or warrant to purchase Unit stock shall automatically convert into an option to
purchase a number of shares of U.S. Filter common stock equal to (x) the number
of shares of Unit Common Stock issuable immediately as of the date of this
Agreement upon exercise of such Unit stock option or warrant multiplied by (y)
the Exchange Ratio with an exercise price equal to the exercise price which
existed under the corresponding Unit stock option or warrant divided by the
Exchange Ratio, and with such other terms and conditions, subject to U.S.
Filter's approval, as were in effect under such Unit stock option or warrant as
of the date of this Agreement.

     Fractional shares will not be issued, but the pro rata portion of the net
proceeds of the sale of all such shares will be paid in cash to the persons
entitled thereto.  As a result of the conversion of the Unit Common Stock, the
Unit Common Stock will be de-listed from the Nasdaq National Market tier of The
Nasdaq Stock Market and will not be listed on any national securities exchange
or quoted in any inter-dealer quotation system, and holders of Unit Common Stock
will become shareholders of U.S. Filter.  Additionally, if the Merger becomes
effective, the directors and officers of Subcorp, immediately prior to the
Merger, will become the directors and officers of the Surviving corporation.

     On July 17, 1998, the Company announced in a press release that it intends
to reduce its worldwide workforce by approximately 15% and is initiating partial
domestic plant shutdowns in response to the continuing downturn in the
semiconductor equipment market.

     The partial plant shutdowns will be effected by closing domestic facilities
on Fridays, allowing for only limited services and production on such days.  The
magnitude and financial impact of these actions has not yet been determined, but
will be included in the Company's quarterly report on Form 10-Q for the first
fiscal quarter ending August 29, 1998.



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

     Not applicable.

                                      44 
<PAGE>

                                    PART III
                                        

ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
                                          
        Name of Nominee                            Age        Principal Occupation
        ---------------                            ---        --------------------
<S>                                                <C>         <C>
        Michael J. Doyle (3)                        45        Chairman of the Board of Directors,
                                                              Chief Executive Officer and Director
        George Boyadjieff  (1)(2)(3)                60        Director
        Gary N. Patten                              51        Vice President, Chief Financial Officer
                                                              and Secretary
        Edward Rogas, Jr.  (1)(2)(3)                58        Director
        Donald M. Spero (1)(2)(3)                   58        Director
 
        (1)   Member of the Compensation Committee of the Board of Directors
        (2)   Member of the Audit Committee of the Board of Directors
        (3)   Member of the Nominating Committee of the Board of Directors
</TABLE>


          Mr. Doyle has been President and Chief Executive Officer of the
Company since September, 1995.  Formerly, he was President of Unit from 1984 to
1995 while it was a wholly-owned subsidiary of Autoclave Engineers, Inc.  Mr.
Doyle also served as a director of Autoclave Engineers, Inc. from 1984 until its
merger into Unit in September, 1995.  Mr. Doyle co-founded Unit Instruments in
1980.

          Mr. Boyadjieff has been a director of the Company since 1995.  He is
President and Chief Executive Officer of Varco International, Inc. ("Varco"), a
leading manufacturer of products used in the international oil and gas well
industry.  Mr. Boyadjieff has been associated with Varco for 25 years and has
served in a variety of technical and executive positions.  He is also a director
of Varco.

          Mr. Patten has served as Vice President, Chief Financial Officer and
Secretary since June, 1995.  From 1986 to 1995, he was Vice President, Chief
Financial Officer and Secretary of Optical Radiation Corporation, a diversified
manufacturer of medical devices, eyeware and industrial products.

          Mr. Rogas has been a director of the Company since 1995.  He is Vice
President of Teradyne, Inc. ("Teradyne"), a leading manufacturer of
semiconductor, circuit-board and telecommunications test systems.  Mr. Rogas has
been associated with Teradyne since 1976 in various management and executive
positions.

                                      45 
<PAGE>

          Mr. Spero has been a director since January, 1998.  He previously
served as a director of the predecessor company, Autoclave Engineers, Inc., from
1987 until 1995.  In 1971, he co-founded Fusion Systems Corporation, a supplier
of ultraviolet curing systems, and served as President and CEO until 1992.
Since 1992, Mr. Spero has served as President of Spero Quality Strategies, a
management consulting company.


ITEM 11.   EXECUTIVE COMPENSATION

          The following table sets forth the annual and long-term compensation
for the fiscal years ended May 31, 1998, 1997 and 1996 paid by the Company (i)
to each individual serving as the chief executive officer of the Company during
fiscal 1998 and (ii) all other executive officers of the Company who earned
total compensation during fiscal 1998 exceeding $100,000 (the "Executive
Group").  Except as disclosed below, no executive officer of the Company had a
total annual salary and bonus during fiscal 1998 exceeding $100,000.


                          SUMMARY COMPENSATION TABLE
<TABLE> 
<CAPTION> 
                                                                            LONG-TERM COMPENSATION
                                                                            -----------------------
                                             ANNUAL COMPENSATION               AWARDS      PAYOUTS
                                  --------------------------------------    -----------    --------
                                                                 OTHER        SECURITIES                      ALL  
                                                                 ANNUAL       UNDERLYING     LTIP            OTHER             
NAME AND PRINCIPAL                        SALARY     BONUS     COMPENSATION    OPTIONS      PAYOUTS       COMPENSATION         
     POSITION                     YEAR     ($)      ($) (1)      ($) (2)         (#)          ($)            ($) (3)           
     --------                     ----     ---      -------      -------         ---          ---            -------           
<S>                                <C>    <C>        <C>          <C>         <C>           <C>              <C>               
Michael J. Doyle                  1998   197,992         --        9,000         15,000          --           62,273(4)        
    PRESIDENT AND CHIEF           1997   199,992         --        9,000          7,000          --           21,138(4)        
    EXECUTIVE OFFICER             1996   180,417     96,000           --        150,000     133,785            5,280           
Gary N. Patten                    1998   149,989         --        8,400         10,000          --            5,899           
    VICE PRESIDENT, CHIEF         1997   149,989         --        8,400         55,600          --            5,125           
    FINANCIAL OFFICER AND         1996   138,451     54,000           --         42,220          --            1,904           
    SECRETARY
</TABLE>

(1)  Represents bonuses earned by the Named Executive in the year indicated;
     which were paid in the subsequent year.
(2)   Represents auto allowance.
(3)  Except as otherwise indicated, represents Company contributions under the
     401(k) Plan and imputed value of company paid life insurance premiums.
(4)  Includes value realized on the exercise of stock options of $57,373 and
     $18,400 in 1998 and 1997, respectively.


OPTION GRANTS IN THE LAST FISCAL YEAR

     The following table sets forth certain information for the Executive Group
with respect to grants by the Company during fiscal 1998 of stock options
pursuant to the Company's 1997 Stock Plan to purchase Common Stock of the
Company.  The Company's 1987 Stock Plan was terminated on June 18, 1997.  The
1997 Stock Plan was approved by shareholders on October 24, 1997.

                                      46 
<PAGE>

                       OPTION GRANTS IN LAST FISCAL YEAR
                       ---------------------------------
<TABLE> 
<CAPTION> 
                                                                                                        Potential Realizable 
                                                   % of Total                                         Value at Assumed Annual 
                                 Number of           Options                                            Rates of Stock Price 
                                Securities           Granted to                                           Appreciation for
                                Underlying           Employees     Exercise or                             Option Term (3)
                              Options Granted        in Fiscal     Base Price     Expiration              ---------------
Name                              (#)(1)              Year (2)       ($/Sh)          Date                5%($)        10%($)
----                              ------              --------       ------          ----                -----        ------
<S>                          <C>                  <C>            <C>            <C>                 <C>          <C> 
Michael J. Doyle                  15,000                8.8%         $10.00         11/24/07            $94,350      $239,100
Gary N. Patten                    10,000                5.9%         $10.00         11/24/07            $62,900      $159,400
</TABLE>

(1)  These stock options were granted pursuant to the 1997 Stock Plan.  These
     stock options have ten year terms and vest 50% upon grant and 50% pro rata
     during the first year of grant.

(2)  An aggregate of 170,000 stock options to purchase shares of Common Stock,
     pursuant to the 1997 Stock Plan, were granted to employees during fiscal
     1998.

(3)  Potential realizable value is based on an assumption that the stock price
     of Common Stock appreciates at the annual rate shown (compounded annually)
     from the date of grant until the end of the ten year option term.  One
     share of stock purchased at $10.00 in 1998 would yield profits of $6.29 per
     share at 5% appreciation over ten years, or $15.94 per share at 10%
     appreciation over the same period.  These numbers are calculated based on
     the requirements promulgated by the Securities and Exchange Commission and
     do not reflect the Company's estimate of future stock price.



DEFERRED COMPENSATION AGREEMENTS

     The Company has deferred compensation agreements with one current and five
former employees, including Mr. Doyle and Mr. Levinson, a former director and
officer of the Company.  Under the agreements, the Company will make fixed
monthly post-retirement payments to each employee until their death, in amounts
based upon the employees' annual salaries at the time of retirement.  Pursuant
to such agreements, the employees have agreed to refrain from competing with the
Company, to maintain the confidentiality of the Company's trade secrets and to
renounce all personal interest in patents, know-how and other intellectual
property developed by them during their employment by the Company.  Mr. Levinson
began receiving payments under the deferred compensation program in October,
1995 upon his retirement from active service with the Company.

LONG TERM INCENTIVE PLAN

     The Company's predecessor, Autoclave Engineers, Inc., maintained a Long
Term Incentive Plan ("LTI Plan") for each of its operating subsidiaries, of
which Unit Instruments was a subsidiary at that time.  Upon the reorganization,
the LTI Plan for the divested operating subsidiaries was terminated without
payment of any earned incentive.  Subsequently, the Board of Directors and
management determined that the LTI Plan was inappropriate for Unit

                                      47 
<PAGE>

Instruments as an independent, publicly-held, high technology company.
Accordingly, the Company proposed to the four (4) LTI Plan participants that the
Plan be voluntarily terminated effective August 30, 1995 and the participants
agreed to such termination. In consideration for this voluntary termination, the
Company agreed to pay each participant all of their earned incentive in cash
instead of 50% to 70% in one (1) year restricted Common Stock. Mr. Doyle was one
of the participants in the LTI Plan and his earned incentive, through the date
of termination, was $133,785, as is reflected in the "Summary Compensation
Table."

DIRECTOR'S COMPENSATION

     Except as stated below, the Company's directors received no compensation in
connection with their services as directors on the Board of Directors in fiscal
1998.  For services rendered in fiscal 1998, all non-executive directors
received fees or remuneration in the amount of $2,000 per meeting attended, plus
reimbursement for expenses to attend Board Meetings.  Additionally, all non-
executive directors are entitled to receive automatic grants of stock options of
the Company's common stock in compensation for their services.  See "Certain
Relationships and Related Transactions."

INVOLUNTARY SEVERANCE AGREEMENTS

     The Company has entered into agreements with two executive officers
(Messrs. Doyle and Patten) and five additional employees, inclusively, Messrs.
Evans, Lamirande, Sheriff, Urdaneta and Ms. Tricoli, providing severance
benefits in the event they are terminated within three (3) years following a
change in control of the Company.  Such agreements with former executives,
Messrs. Saloka and Leggat have been canceled.  Pursuant to such agreements, a
change in control occurs (i) when any person becomes the beneficial owner of
securities of the Company representing more than 20% of the combined voting
power of the Company's then outstanding securities; (ii) if, during any period
of two consecutive years, individuals who constitute the Board of Directors
cease to constitute a majority of the Board of Directors; (iii) if all, or
substantially all, of the Company's assets are sold or transferred to a third
party; (iv) if the Company consolidates or merges with another company and the
Company is not the survivor; or (v) if the Company no longer has a class of
securities registered pursuant to Section 12 of the Exchange Act.  The
agreements provide that if the officer is terminated prior to or following a
change in control of the Company, the Company shall pay such officer a sum equal
to three times his or her annual salary and bonus paid during the twelve-month
period immediately preceding the termination, vest the officer in any unvested
benefits under any retirement or deferred compensation plan in which the officer
participates, and pay for a three year continuation of such officer's health,
life, disability and accident insurance. However, the agreements provide that to
the extent such benefits would constitute an "excess parachute payment" under
Section 280G of the Internal Revenue Code of 1986, the severance payments
payable thereunder shall be reduced.

                                      48 
<PAGE>
 
OPTION EXERCISES AND FISCAL YEAR-END VALUES

     The following table sets forth information with respect to options to
purchase the Company's Common Stock granted under the 1997 and 1987 Stock Option
Plans to the Executive Group, including (i) the number of shares purchased upon
exercise of options in  fiscal 1998, (ii) the net value realized upon such
exercise, (iii) the number of unexercised options outstanding at May 31, 1998
and (iv) the value of such unexercised options at May 31, 1998:


                          AGGREGATED OPTION EXERCISES
             IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES

<TABLE> 
<CAPTION> 
                                                               Number of                         Value of
                                                         Securities Underlying                 Unexercised
                                                      Unexercised Options at Fiscal         In-the-Money Options
                            Shares        Value              Year End (#)               at Fiscal Year End (1) ($)
                          Acquired on    Realized            ------------              ---------------------------     
Name                      Exercise (#)      ($)      Exercisable       Unexercisable   Exercisable      Unexercisable
----                      ------------   ---------   -----------       -------------   -----------      -------------
<S>                          <C>           <C>          <C>                <C>               <C>              <C>
Michael J. Doyle             10,227        57,373       81,961             99,350           --                --
Gary N. Patten                   --            --       35,508             72,318           --                --
</TABLE>

(1)  Market value of underlying securities at year-end ($6.50) minus the
     exercise price multiplied by the number of  shares.


REPORT OF THE COMPENSATION COMMITTEE

     The Compensation Committee of the Board of Directors establishes the
compensation plans and polices and the specific compensation levels for
executive officers and administers the 1997 and 1987  Stock Plans.

COMPENSATION POLICIES

       There are three major elements of the Company's executive compensation
     program:  base salaries, incentive bonuses and long-term stock options.

       The Compensation Committee establishes the salaries of executive officers
     primarily by reference to data contained in the American Electronics
     Association (AEA) survey of executive compensation in the electronics
     industry.  The Committee also cross-references this survey data with salary
     surveys for the Southern California area.  The Committee establishes base
     salaries that are within the range of salaries for persons holding
     positions of similar responsibility at comparably-sized technology
     companies.  In addition, the Committee considers factors such as relative
     Company performance, the individual's past performance, his or her future
     potential and the individual's experience and ability as judged by the
     Committee.

                                      49
<PAGE>

       Annual bonuses for executive officers are primarily based on the
     achievement of performance targets set forth in the Company's operating
     plan for the year.  The annual cash bonus for executives, other than the
     Chief Executive Officer, Michael J. Doyle, is based on operating profits in
     relation to the Company's operating plan and a factor based on Mr. Doyle's
     subjective judgment of the executive's performance.  No bonuses were earned
     for fiscal 1998 because of the downturn in the semiconductor equipment
     market and the corresponding effect on the Company's financial performance.

       The Compensation Committee believes that stock options are an effective
     long-term compensation device in that they serve to align the interests of
     the executive officers with those of the shareholders and motivate officers
     to remain in the Company's employ.


     COMPENSATION OF CHIEF EXECUTIVE OFFICER

       Mr. Doyle's base salary was increased from $153,000 to $200,000 in
     September, 1995 upon the reorganization.  This increase was based upon
     survey data and range recommendations from an outside executive
     compensation consulting firm for chief executive officers of high
     technology public companies.  Mr. Doyle was previously President of the
     Company when it was a subsidiary of the predecessor Company.  Mr. Doyle did
     not receive an increase in base pay for fiscal 1998 or 1997 because of the
     downturn in the semiconductor equipment market and the resulting impact on
     the Company's performance for these years.

       Mr. Doyle is entitled to an annual cash bonus, which for fiscal 1998 was
     not applicable based on the Company's operating loss.  Mr. Doyle's target
     bonus rate was 40% of his annual base salary with such amount adjusted up
     or down depending on actual adjusted operating profits.  For fiscal 1998,
     the Company did not achieve an operating profit.  Accordingly, Mr. Doyle
     did not receive a bonus.


     DEDUCTIBILITY OF EXECUTIVE COMPENSATION

       As a result of legislation adopted in 1993, the Internal Revenue Code now
     limits the federal income tax deductibility of compensation paid to the
     Company's Chief Executive Officer and to each of the other four most highly
     compensated executive officers.  For this purpose, compensation can
     include, in addition to cash compensation, the difference between the
     exercise price of stock options and the value of the underlying stock on
     the date of exercise.  Under this legislation, the Company may deduct
     compensation with respect to any of these individuals only to the extent
     that during any fiscal year such compensation does not exceed $1 million or
     does not meet certain other conditions (such as shareholder approval).
     Based on the Company's current compensation plans and policies, and
     proposed regulations interpreting the new

                                      50 
<PAGE>

     legislation, the Company and the Committee believe that, for the near
     future, there is little risk that the Company will lose any significant tax
     deduction for executive compensation.


     George Boyadjieff                     Donald M. Spero
     of the Compensation Committee         of the Compensation Committee


     Edward Rogas, Jr.                 
     of the Compensation Committee


COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

     The Compensation Committee is composed of George Boyadjieff, Edward Rogas,
Jr. and Donald M. Spero who are non-employee directors with no interlocking
relationships as defined by the Securities and Exchange Commission.

                                      51 
<PAGE>

ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
           AND MANAGEMENT

     The following table presents certain information as of June 30, 1998,
except as otherwise noted, regarding the equity securities of Unit beneficially
owned by (i) the directors, (ii) the executive officers named in the "Summary
Compensation Table", (iii) the directors and executive officers of Unit as a
group, and (iv) the only beneficial owners known to Unit to hold more than 5% of
the Company's Common Stock.

<TABLE>
<CAPTION>
                                                                               Percent of
                                              Number of Shares                 Company's
Name                                       Beneficially Owned (1)             Common Stock
-----                                      ----------------------             -------------
<S>                                             <C>                                <C>
Directors and Executive Officers:
George Boyadjieff                                 5,761 (2)                         *
Michael J. Doyle                                222,140 (3)                        5.4%
Gary N. Patten                                   64,202 (4)                        1.6%
Edward Rogas, Jr.                                 5,761 (5)                         *
Donald M. Spero                                  13,383 (6)                         *
All Directors and Officers as a group           311,247 (7)                        7.4%
 (5 persons)
 
 
Others:
The Killen Group, Inc.                          534,300 (8)                       13.4%
1199 Lancaster Avenue
Berwyn, PA  19312-1298
Dimensional Fund Advisors, Inc.                 338,626 (9)                        8.5%
1299 Ocean Avenue, 11th Floor
Santa Monica, CA  90401
U. S. Bancorp                                  263,548 (10)                        6.6%
601 2nd Avenue South
Minneapolis, MN  55402-4302
</TABLE> 
*  Less than 1%

(1)  Beneficial ownership is determined in accordance with the rules of the
     Securities and Exchange Commission and generally includes voting or
     investment power with

                                      52 
<PAGE>

 respect to securities. Shares of common stock subject to options or warrants
 currently exercisable or exercisable within 60 days of June 30, 1998 are deemed
 to be beneficially owned by the person holding such option or warrant for
 computing the percentage ownership of such person, but are not treated as
 outstanding for computing the percentage of any other person. Applicable
 percentages of beneficial ownership are based on 3,995,118 shares of common
 stock outstanding on June 30, 1998.

(2)  Includes 5,761 shares which Mr. Boyadjieff has the right to acquire by the
     exercise of stock options that are currently exercisable or will become
     exercisable within sixty (60) days of June 30, 1998.

(3)  Includes 113,836 shares which Mr. Doyle has the right to acquire by the
     exercise of stock options that are currently exercisable or will become
     exercisable within sixty (60) days of June 30, 1998.

(4)  Includes 45,202 shares which Mr. Patten has the right to acquire by the
     exercise of stock options that are currently exercisable or will become
     exercisable within sixty (60) days of June 30, 1998.

(5)  Includes 5,761 shares which Mr. Rogas has the right to acquire by the
     exercise of stock options that are currently exercisable or will become
     exercisable within sixty (60) days of June 30, 1998.

(6)  Includes 13,383 shares which Mr. Spero has the right to acquire by the
     exercise of stock options that are currently exercisable or will become
     exercisable within sixty (60) days of June 30, 1998.

(7)  Includes 183,943 shares which executive officers and directors have the
     right to acquire by exercise of stock options that are currently
     exercisable or will become exercisable within sixty (60) days of June 30,
     1998.

(8)  Based on Schedule 13G filed February 17, 1998, The Killen Group reports
     sole voting power for 267,993 shares and sole dispositive power for 534,300
     shares.

(9)  Based on Schedule 13G filed February 9, 1998, Dimensional Fund Advisors,
     Inc. reports sole voting power for 232,746 shares and sole dispositive
     power for 338,626 shares.

(10) Based on Schedule 13G filed February 9, 1998, U.S. Bancorp reports sole
     voting power for 263,548 shares and sole dispositive power for 262,548
     shares.

                                      53 
<PAGE>

                         COMPLIANCE WITH SECTION 16(a)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                                        
     Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") requires the Company's executive officers and directors, and
persons who own more than ten-percent (10%) of a registered class of the
Company's equity securities, to file an initial report of ownership on Form 3
and changes in ownership on Form 4 or 5 with the Securities and Exchange
Commission (the "SEC") and the National Association of Securities Dealers, Inc.
Executive officers, directors and greater than ten-percent shareholders are also
required by SEC rules to furnish the Company with copies of all Section 16(a)
forms they file.  To the Company's knowledge, based solely on its review of
copies of such forms received by the Company during the fiscal year ended May
31, 1998, all Section 16(a) filing requirements applicable to its officers,
directors and greater than ten-percent beneficial owners were complied with.


ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The Company's non-employee Directors receive, automatically, stock option
grants under the terms of the Company's 1990 Non-Employee Director Stock Option
Plan.

     During fiscal 1998, the Company repurchased 412,215 shares of its common
stock for $5,049,634 ($12.25 per share), from James Levinson, a former director
and Chairman of the Board, and family members.  The Company also purchased Mr.
and Mrs. Levinsons' stock option contracts of 18,868 shares for $54,479.

     No other significant transactions, business relationships, or indebtedness
are known to exist between the Company and related parties (defined as
directors, executive officers, nominees for director, security holders of more
than 5% of the voting stock or any members of the immediate family of any of the
foregoing persons).

                                      54 
<PAGE>

                                    PART IV
                                        
ITEM 14.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
           REPORTS ON FORM 8-K

(a)  The following documents are filed as part of this Report on Form 10-K.

     1. Financial Statements. The following consolidated financial statements of
        ---------------------
        Unit Instruments, Inc. and subsidiaries and the Report of Independent
        Accountants are filed as part of this Report on Form 10-K and should be
        read in conjunction with the related notes thereto, included herein.

<TABLE> 
<CAPTION> 
                                                                         Page
                                                                        ------
<S>                                                                       <C> 
        Report of Independent Accountants                                 21
                                                                          
        Consolidated Balance Sheets - May 31, 1998 and 1997               22
                                                                          
        Consolidated Statement of Operations - Years Ended                23
        May 31, 1998, 1997 and 1996                                       
                                                                          
        Consolidated Statement of Shareholders' Equity -                  24
        Years Ended May 31, 1998, 1997 and 1996                         
                                                                          
        Consolidated Statement of Cash Flows - Years Ended                25
        May 31, 1998, 1997 and 1996                                       
                                                                          
        Notes to Consolidated Financial Statements                        26
</TABLE> 

     2. Schedule II.  Valuation and Qualifying Accounts

        Financial Statement Schedules.  All other schedules are omitted because
        ------------------------------                                         
        they are not required, are not applicable, or the information is
        included in the consolidated financial statements or notes hereto.

     3. Exhibits. The following Exhibits are filed as part of, or incorporated
        ---------
        by reference into, this Report on Form 10-K.

                                      55 
<PAGE>

<TABLE> 
<CAPTION> 

EXHIBIT NUMBER:               Description:
---------------               ------------
<S>                           <C>  

     3.1                      Registrant's Articles of Incorporation.  (Incorporated by
                              reference to Exhibit 3.1 of Annual Report on Form 10K
                              for the fiscal year ended May 31, 1996.)
     3.2                      Registrant's By-laws.  (Incorporated by reference to
                              Exhibit 3.2 of Annual Report on Form 10K for the fiscal
                              year ended May 31, 1996.)
     4.3                      Specimen Stock Certificate.  (Incorporated by reference to
                              Exhibit 4.3 of Annual Report on Form 10K for the fiscal
                              year ended May 31, 1996.)
    10.1*                     Form of Unfunded Deferred Compensation Agreement, as
                              amended.  (Incorporated by reference to Exhibit 10(a) of
                              Registrant's Quarterly Report on Form 10-Q for the fiscal
                              quarter ended August 31, 1983.)
    10.2*                     1987 Stock Plan, as amended.  (Incorporated by reference
                              to Exhibit 4.1 of Registrant's Registration Statement on
                              Form S-8 (No. 33-37292) filed on October 15, 1990.)
    10.3*                     1990 Non-Employee Director Stock Option Plan, as amended.
                              (Incorporated by reference to Exhibit 4.1 of Registrant's
                              Registration Statement on Form S-8 (No. 33-58550) filed on
                              February 17, 1993.)
    10.4                      Stock Purchase Agreement dated as of January 19, 1995 by
                              the Company and James Howden & Godfrey Overseas Limited.
                              (Incorporated by reference to Exhibit 2.1 to Registrant's
                              Current Report on Form 8-K dated January 19, 1995.)
    10.5                      Asset Purchase Agreement dated as of August 14, 1995 by
                              the Company and Snap-tite, Inc.  (Incorporated by
                              reference to Exhibit 10(p) to Registrant's Annual Report
                              on Form 10-K for the fiscal year ended May 31, 1995.)
    10.6                      Share Repurchase Agreement dated as of June 22, 1995 by
                              and among James C. Levinson, Marilyn Gasche Levinson,  the
                              J & L Levinson Partnership and the Company. (Incorporated
                              by reference to Exhibit 10(q) to Registrant's Annual
                              Report on Form 10-K for the fiscal year ended May 31,
                              1995.)
    10.7                      Plan of Merger merging Autoclave Engineers, Inc. (a
                              Pennsylvania Corporation) with and into Unit Instruments,
                              Inc. (a California corporation).  (Incorporated by
                              reference to Exhibit 2.1 to Registrant's Current Report on
                              Form 8-K dated November 22, 1995.)
</TABLE> 

                                      56 
<PAGE>

<TABLE> 
<S>                        <C> 
10.8                       Business Loan Agreement dated January 23, 1996 by the
                           Company and Bank of America, NTSA.  (Incorporated by
                           reference to Exhibit 10.8 of Annual Report on Form 10K
                           for the year ended May 31, 1996.)
10.9*                      Form of Involuntary Severance Agreement with certain
                           officers of the Company.  (Incorporated by reference
                           to Exhibit 10.9 of Annual Report on Form 10K for the year
                           ended May 31, 1996.)
10.10                      Agreement and Plan of Reorganization and Merger dated
                           April 23, 1996 among the Company, CSI Acquisition
                           Corporation and Control Systems, Inc.  (Incorporated by
                           reference to Exhibit 10.10 of Annual Report on Form 10K
                           for the year ended May 31, 1996.)
10.11                      Stock Repurchase Agreement dated January 2, 1998 by and
                           among the Company and James C. Levinson and Marilyn G.
                           Levinson.
10.12*                     1997 Stock Incentive Plan
10.13                      Agreement and Plan of Merger dated July 2, 1998 by and
                           between the Company, Kinetics Acquisition Corp., and
                           United States Filter Corporation.  (Incorporated by
                           reference to Exhibit 3.1 of Current Report on Form 8-K
                           dated July 2, 1998.)
10.14                      First Amendment to the Agreement and Plan of Merger dated
                           August 5, 1998 by and between the Company, Kinetics
                           Acquisition Corp., and United States Filter Corporation.
22.1                       Subsidiaries of Registrant.
23.1                       Consent of Independent Accountants.
27.1                       Financial Data Schedule (for electronic filing only.)
27.2                       Restated Financial Data Schedule (for electronic filing only.)
27.3                       Restated Financial Data Schedule (for electronic filing only.)
</TABLE> 

   Items marked with an asterisk (*) are management contracts or compensatory
   contracts or arrangements.
             
(b)     Reports on Form 8-K
        No reports on Form 8-K were filed during quarter ended May 31, 1998.

(c)     Exhibits
        The exhibits required by this Item are listed under Item 14 (a)(3).

(d)     Financial Statement Schedules
        The financial statement schedules required by this Item are listed under
        [Item 14(a)(2)].

                                      57 
<PAGE>
 
                                   SIGNATURES

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

                             UNIT INSTRUMENTS, INC.

                       By:   /s/ Gary N. Patten
                             ------------------
                             Gary N. Patten
                             Chief Financial Officer
                             Chief Accounting Officer and Secretary

Date:  July 21, 1998


                               POWER OF ATTORNEY


     KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Michael J. Doyle and Gary N. Patten,
jointly and severally, his or her respective attorneys-in-fact, each with the
power of substitution, for each other in any and all capacities, to sign any
amendments to this Report on Form 10-K, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his or her respective substitute or substitutes, may do or
cause to be done by virtue hereof.

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

<TABLE> 
<CAPTION>

        SIGNATURE                            TITLE                               DATE
-------------------------     --------------------------------     ------------------------------
<S>                             <C>                                     <C> 
 
/s/ Michael J. Doyle             President, Chief Executive                  July 21, 1998
-------------------------        Officer
 (Michael J. Doyle)
 
/s/ Gary N. Patten               Chief Financial Officer,                    July 21, 1998
-------------------------        Chief Accounting Officer and
 (Gary N. Patten)                Secretary
</TABLE> 

                                      58
<PAGE>
 
<TABLE> 
<S>                              <C>                                  <C> 
 
/s/ George Boyadjieff            Director                                    July 21, 1998
-------------------------
 (George Boyadjieff)
 
/s/ Edward Rogas                 Director                                    July 21, 1998
-------------------------
 (Edward Rogas)
 
/s/ Donald M. Spero              Director                                    July 21, 1998
-------------------------
 (Donald M. Spero)
</TABLE>

                                      59
<PAGE>
 
SCHEDULE II
 
                       VALUATION AND QUALIFYING ACCOUNTS
<TABLE> 
<CAPTION> 

                                                   ADDITIONS
                                         ------------------------------
                                             CHARGED TO     CHARGED TO
                             BALANCE AT      COSTS AND        OTHER                        BALANCE AT
DESCRIPTION                 MAY 31, 1995      EXPENSES       ACCOUNTS      DEDUCTIONS     MAY 31, 1996
-----------                --------------   ------------   ------------   ------------   ---------------
<S>                        <C>              <C>            <C>            <C>            <C>  
 
Bad debt reserve               110,000         32,000             --          7,000           135,000
Inventory reserve              207,000        850,000             --        641,000           416,000
 
 
                                                     ADDITIONS
                                         ------------------------------
                                             CHARGED TO     CHARGED TO
                             BALANCE AT      COSTS AND        OTHER                        BALANCE AT
DESCRIPTION                 MAY 31, 1996      EXPENSES       ACCOUNTS      DEDUCTIONS     MAY 31, 1997
-----------                --------------   ------------   ------------   ------------   ---------------
<S>                        <C>              <C>            <C>            <C>            <C>   
Bad debt reserve               135,000         24,000             --         10,000           149,000
Inventory reserve              416,000        590,000             --        475,000           531,000
 
 
                                                     ADDITIONS
                                         ------------------------------
                                             CHARGED TO     CHARGED TO
                             BALANCE AT      COSTS AND        OTHER                        BALANCE AT
DESCRIPTION                 MAY 31, 1997      EXPENSES       ACCOUNTS      DEDUCTIONS     MAY 31, 1998
-----------                --------------   ------------   ------------   ------------   ---------------
<S>                        <C>              <C>            <C>            <C>            <C>  
Bad debt reserve               149,000        114,000             --        128,000           135,000
Inventory reserve              531,000      1,710,000             --      1,478,000           763,000
</TABLE>

                                      60