<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549


                                    FORM 10-Q
(MARK ONE)

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


For the quarterly period ended September 30, 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 0-20470

                       Integrated Process Equipment Corp.
             (Exact name of registrant as specified in its charter)

          Delaware                                              77-0296222      
 (State or other jurisdiction                                (I.R.S. employer 
of incorporation or organization)                            identification no.)

         911 Bern Court,  San Jose, California                    95112    
(Address of principal executive offices)

Registrant's telephone number, including area code  (408) 436-2170              


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

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

         As of November 12, 1998, 7,186 shares of Class A Common Stock and
17,841,457 shares of Common Stock of the registrant were outstanding.



                                  Page 1 of 26
<PAGE>   2
                          PART I. FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

               INTEGRATED PROCESS EQUIPMENT CORP. AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                                         JUNE 30,      SEPTEMBER 30,
                                  Assets                                                  1998             1998
                                                                                        ---------        ---------
                                                                                                        (Unaudited)
Current assets:
<S>                                                                                     <C>              <C>      
    Cash and cash equivalents                                                           $  14,098        $   2,260
    Short term investments                                                                 70,032           68,864
    Accounts receivable                                                                    43,837           39,310
    Inventories                                                                            67,049           66,226
    Prepaid expenses                                                                        2,686            1,800
                                                                                        ---------        ---------
            Total current assets                                                          197,702          178,460
                                                                                        ---------        ---------

Property, plant and equipment, net                                                         34,883           34,600
Intangible assets, net                                                                      8,820            8,299
Other assets                                                                                4,483            4,106
                                                                                        ---------        ---------

                                                                                        $ 245,888        $ 225,465
                                                                                        =========        =========

                   LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
    Current portion of long-term debt                                                   $   1,555        $   1,344
    Accounts payable                                                                       10,443            4,680
    Accrued liabilities                                                                    21,528           17,357
                                                                                        ---------        ---------
            Total current liabilities                                                      33,526           23,381


Long-term debt, less current portion                                                      117,078          116,981
                                                                                        ---------        ---------
        Total liabilities                                                                 150,604          140,362
                                                                                        ---------        ---------

Stockholders' equity:
Preferred stock, $ .01 par value per share. Nonvoting, authorized
    2,000,000 shares:
    Series B-1 cumulative preferred stock.  Authorized 21,478 shares,
      issued and outstanding 14,408 shares at June 30, 1998 and 7,204 shares
      at September 30, 1998.  Liquidation preference of $671.                                --               --
    Series B-2 cumulative preferred stock.  Authorized 21,478 shares,
      issued and outstanding 19,544 shares at June 30, 1998 and September 30,
      1998. 
      Liquidation preference of $1,820                                                       --               --
    Series B-3 cumulative preferred stock.  Authorized 21,478 shares,
      issued and outstanding 9,898 shares at June 30, 1998 and September 30,
      1998. 
      Liquidation preference of $922.                                                        --               --
    Series D preferred stock, $.01 par value per share. Authorized 50,000 shares,
      1,000 votes per share; no shares issued and outstanding.                               --               --
Common stock, $.01 par value per share.  Authorized 50,000,000 shares;
     one vote per share; issued and outstanding 17,530,368 shares at
     June 30, 1998 and 17,839,794 at September 30, 1998.                                      175              178
Class A common stock, $.01 par value per share.  Authorized 3,500,000
    shares, four votes per share; issued and outstanding 223,675 shares at
    June 30, 1998 and 7,186 shares at September 30, 1998.                                       2             --
Additional paid-in capital                                                                196,242          196,357
Accumulated deficit                                                                      (100,355)        (110,627)
Foreign currency translation adjustment                                                      (780)            (805)
                                                                                        ---------        ---------
            Total stockholders' equity                                                     95,284           85,103
                                                                                        ---------        ---------
                                                                                        $ 245,888        $ 225,465
                                                                                        =========        =========
</TABLE>

See accompanying notes to condensed consolidated financial statements.

                                        2
<PAGE>   3
               INTEGRATED PROCESS EQUIPMENT CORP. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                   (Unaudited)




<TABLE>
<CAPTION>
                                                                           THREE MONTHS ENDED
                                                                              SEPTEMBER 30,
                                                                        ------------------------
                                                                          1997            1998
                                                                        --------        --------
<S>                                                                     <C>             <C>     
Revenue                                                                 $ 51,274        $ 24,954
                                                                                               
Cost of goods sold                                                        29,078          19,489
                                                                        --------        --------
            Gross margin                                                  22,196           5,465
                                                                        --------        --------

Operating expenses:
    Research and development                                               6,709           8,300
    Selling, general and administrative                                    7,788           8,244
                                                                        --------        --------
            Total operating expenses                                      14,497          16,544
                                                                        --------        --------

            Operating income (loss)                                        7,699         (11,079)

Other income (expense):
    Interest income                                                          203             951
    Interest expense                                                        (473)         (2,026)
    Other, net                                                                15           2,056
                                                                        --------        --------
            Total other income (expense)                                    (255)            981
                                                                        --------        --------

            Income (loss) before income taxes                              7,444         (10,098)

Income tax expense                                                         2,753            --
                                                                        --------        --------

            Net income (loss)                                              4,691         (10,098)

Cumulative dividends on preferred stock                                      (61)            (51)
                                                                        --------        --------

            Net income (loss) attributable to common stockholders       $  4,630        $(10,149)
                                                                        ========        ========

Income (loss) per common share:
     Basic                                                              $    .27        $   (.57)
                                                                        ========        ========
     Diluted                                                            $    .24        $   (.57)
                                                                        ========        ========


Shares used in basic per share calculation                                17,453          17,821
                                                                        ========        ========
Shares used in diluted per share calculation                              19,492          17,821
                                                                        ========        ========
</TABLE>



See accompanying notes to condensed consolidated financial statements.

                                        3

<PAGE>   4
       CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
               FOR THE THREE-MONTH PERIOD ENDED SEPTEMBER 30, 1998
                      (in thousands, except share amounts)
                                   (Unaudited)


<TABLE>
<CAPTION>
                                                                                                                                    
                                           Series B                                                               Class A           
                                        Preferred Stock                       Common Stock                      Common Stock        
                                   -----------------------------       ---------------------------       ---------------------------
                                    Shares             Amount            Shares           Amount          Shares           Amount   
                                   ----------        -----------       ----------       ----------       ----------      ---------- 
<S>                                    <C>           <C>               <C>              <C>                   <C>        <C>        
Balance -
  June 30, 1998                        43,850        $      --         17,530,368       $      175          223,675      $        2 

Net loss                                 --                 --               --               --               --              --   

Conversion of Series B
  Preferred Stock                      (7,204)              --             90,338                1             --              --   

Conversion of Class A
  Common Stock                           --                 --            216,489                2         (216,489)             (2)

Exercise of Stock Options                --                 --                103             --               --              --   

Employee Stock Purchase Plan             --                 --               --               --               --              --   

Unearned compensation, net               --                 --              2,496             --               --              --   

Cumulative translation adjustment        --                 --               --               --               --              --   

Preferred stock dividends                --                 --               --               --               --              --   
                                   ----------        -----------       ----------       ----------       ----------      ---------- 

Balance -
September 30, 1998                     36,646        $      --         17,839,794       $      178            7,186      $     --   
                                   ==========        ===========       ==========       ==========       ==========      ========== 
</TABLE>

<TABLE>
<CAPTION>
                                                                         Foreign
                                    Additional                           Currency
                                     Paid-In         Accumulated        Translation
                                     Capital           Deficit           Adjustment
                                    ----------        ----------         ----------
<S>                                 <C>               <C>               <C>        
Balance -
  June 30, 1998                     $  196,242        $ (100,355)       $     (780)

Net loss                                  --             (10,098)             --

Conversion of Series B
  Preferred Stock                           (1)             --                --

Conversion of Class A
  Common Stock                            --                --                --

Exercise of Stock Options                 --                --                --

Employee Stock Purchase Plan              --                --                --

Unearned compensation, net                 116              --                --

Cumulative translation adjustment         --                --                 (25)

Preferred stock dividends                 --                (174)             --
                                    ----------        ----------        ----------

Balance -
September 30, 1998                  $  196,357        $ (110,627)       $     (805)
                                    ==========        ==========        ==========
</TABLE>


See accompanying notes to condensed consolidated financial statements.

                                        4
<PAGE>   5
               INTEGRATED PROCESS EQUIPMENT CORP. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
                                   (UNAUDITED)



<TABLE>
<CAPTION>
                                                                                  THREE MONTHS ENDED
                                                                                      SEPTEMBER 30,
                                                                                --------------------------
Cash flows from operating activities:                                             1997             1998
                                                                                ---------        ---------
<S>                                                                             <C>              <C>       
   Net income (loss)                                                            $   4,691        $ (10,098)
   Adjustments to reconcile net  income (loss) to net
     cash used in operating activities:
        Depreciation and amortization                                               2,547            3,133
        Deferred tax expense                                                        2,753             --
        Changes in operating assets and liabilities, net of acquisitions:
           Accounts receivable                                                    (12,632)           4,527
           Inventories                                                             (2,892)             823
           Prepaid expenses and other assets                                         (487)           1,263
           Accounts payable                                                        (2,189)          (5,763)
           Accrued liabilities                                                      1,233           (4,171)
           Net assets of discontinued operations                                   (1,043)            --
                                                                                ---------        ---------
                Net cash used in operating activities                              (8,019)         (10,286)
                                                                                ---------        ---------


Cash flows from investing activities:
    Purchases of property and equipment                                            (5,726)          (2,329)
    Purchase of short-term investments                                               --            (66,985)
    Proceeds from sale of short-term investments                                     --             68,153
                                                                                ---------        ---------
             Net cash used in investing activities                                 (5,726)          (1,161)
                                                                                ---------        ---------

Cash flows from financing activities:
    Proceeds from long-term debt                                                  111,181             --
    Repayment of long-term debt and capital leases                                (25,610)            (308)
    Net proceeds from issuance of common stock and warrants                         2,593              116
    Preferred stock dividends                                                        (123)            (174)
                                                                                ---------        ---------
         Net cash provided by (used in) financing activities                       88,041             (366)
                                                                                ---------        ---------

Effect of exchange rate changes on cash                                                (8)             (25)
                                                                                ---------        ---------

Net increase (decrease) in cash and cash equivalents                               74,288          (11,838)

Cash and cash equivalents, beginning of period                                     40,656           14,098
                                                                                ---------        ---------

Cash and cash equivalents, end of period                                        $ 114,944        $   2,260
                                                                                =========        =========

Supplemental disclosure of cash flow information:
     Cash paid for interest during the period                                   $     245        $   3,670
                                                                                =========        =========
</TABLE>




See accompanying notes to condensed consolidated financial statements.

                                       5
<PAGE>   6
               INTEGRATED PROCESS EQUIPMENT CORP. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

BASIS OF PREPARATION:

         The accompanying condensed consolidated financial statements as of
September 30, 1998 and for the three month period ended September 30, 1998 are
unaudited; however, in the opinion of the management of Integrated Process
Equipment Corp. ("IPEC") and subsidiaries (the "Company"), such statements
include all adjustments (consisting solely of normal recurring accruals)
necessary for the fair statement of the information presented therein. The
condensed consolidated balance sheet as of June 30, 1998 was derived from the
audited financial statements at such date.

         Pursuant to accounting requirements of the Securities and Exchange
Commission applicable to quarterly reports on Form 10-Q, the accompanying
condensed consolidated financial statements and notes do not include all
disclosures required by generally accepted accounting principles for complete
financial statements. Accordingly, these statements should be read in
conjunction with the Company's annual financial statements and notes thereto
included in the Company's annual report on Form 10-K for the year ended June 30,
1998.

         Results of operations for interim periods are not necessarily
indicative of those to be achieved for full fiscal years.

USE OF ESTIMATES

         Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare these financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.

ORGANIZATION:

         IPEC is a Delaware corporation organized in December 1991 and is the
successor by merger to a California corporation of the same name that was
incorporated in October 1989. The Company is primarily engaged in designing,
manufacturing, marketing and servicing equipment for the semiconductor
manufacturing industry.

         The Company is organized into two divisions. IPEC Planar manufactures
CMP equipment and CMP-related products for use principally in manufacturing of
semiconductor devices. IPEC Precision manufactures advanced plasma-assisted
chemical etching equipment and metrology equipment for use primarily in
manufacturing of silicon wafers and semiconductor devices.



                                       6
<PAGE>   7
               INTEGRATED PROCESS EQUIPMENT CORP. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)



SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Income (loss) per share of common stock:

         In February 1997, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 128, "Earnings per Share"
("SFAS 128"). The Statement replaces primary earnings per share ("EPS") with
basic EPS and requires dual presentation of basic and diluted EPS. The Statement
is effective for both interim and annual periods ending after December 15, 1997.
All prior-period EPS data has been restated to conform to SFAS 128. Basic EPS
excludes dilution and is computed by dividing income attributable to common
stockholders or income from continuing operations, by the weighted average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the Company. These
securities or other contracts are generally anti-dilutive if a loss is being
reported. Although including those potential common shares in other diluted per
share computations may be dilutive to their comparable basic per share amounts,
no potential common shares shall be included in the computation of any diluted
per share amount when a loss from continuing operations exists, even if the
entity reports net income.

         The following table reconciles the numerators and denominators of the
basic and diluted EPS computations from continuing operations and net income
attributable to common stockholders for the three month periods ended September
30, 1998 and 1997.


                                       7
<PAGE>   8
               INTEGRATED PROCESS EQUIPMENT CORP. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


<TABLE>
<CAPTION>
                                                                             Three Months Ended
                                                                                 September 30,
                                                                             1997            1998
                                                                           --------        --------

BASIC EARNINGS (LOSS) FROM CONTINUING OPERATIONS PER COMMON SHARE:
<S>                                                                        <C>             <C>      
     Net income (loss) from continuing operations                          $  4,691        ($10,098)
     Cumulative dividend on preferred stock                                     (61)            (51)
                                                                           --------        --------

     Net income (loss) from continuing operations
           attributable to common stockholders                             $  4,630        ($10,149)

                                                                           ========        ========

     Weighted average number of
           shares outstanding                                                17,453          17,821
                                                                           ========        ========

     Basic earnings (loss) from continuing
           operations per share                                            $   0.27        ($  0.57)
                                                                           ========        ========

DILUTED EARNINGS (LOSS) FROM CONTINUING OPERATIONS PER COMMON SHARE:

     Net income (loss) from continuing operations 
           attributable to common stockholders                             $  4,630        ($10,149)
     Add back:  Cumulative dividend on preferred stock                           61             N/A

                                                                           --------        --------
                                                                           $  4,691        ($10,149)
                                                                           --------        --------

     Weighted average number of
          shares outstanding                                                 17,453          17,821

     Add: Shares of Series B Convertible
          Preferred Stock assuming conversion                                   552             N/A

     Add: Treasury stock adjustment                                           1,487             N/A
                                                                           --------        --------

     Weighted average number of shares
          used to compute diluted earnings
          (loss) per share                                                   19,492          17,821
                                                                           ========        ========

     Diluted earnings (loss) per share                                     $   0.24        ($  0.57)
                                                                           ========        ========

BASIC NET INCOME (LOSS) PER COMMON SHARE:

     Net income (loss) attributable
          to common stockholders                                           $  4,630        $(10,149)
                                                                           ========        ========

     Weighted average number of
          shares outstanding                                                 17,453          17,821
                                                                           ========        ========

     Basic net income (loss)
          per common share                                                 $   0.27        ($  0.57)
                                                                           ========        ========

DILUTED NET INCOME (LOSS) PER COMMON SHARE:

     Net income (loss)                                                     $  4,630        ($10,149)
     Add back: Cumulative dividend on preferred shares                           61             N/A
                                                                           --------        --------

     Net income (loss) used in computation                                 $  4,691        ($10,149)
                                                                           ========        ========

     Weighted average number of
          shares outstanding                                                 17,453          17,821

     Add: Shares of Series B Convertible
          Preferred Stock assuming conversion                                   552             N/A

     Add: Treasury stock adjustment                                           1,487             N/A
                                                                           --------        --------

     Weighted average number of shares
          used to compute diluted earnings
          (loss) per share                                                   19,492          17,821
                                                                           ========        ========

     Diluted earnings (loss) per share                                     $   0.24        ($  0.57)
                                                                           ========        ========
</TABLE>

                                       8
<PAGE>   9
               INTEGRATED PROCESS EQUIPMENT CORP. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

INVENTORIES:

         Inventories are summarized as follows (in thousands):

<TABLE>
<CAPTION>
                                                    June 30, 1998        September 30, 1998
                                                   ---------------       ------------------
                                                                             (Unaudited)

<S>                                                <C>                    <C>            
         Raw materials                             $        48,422        $        53,619
         Work in process                                    19,880                 18,669
         Finished goods                                      5,103                    590
                                                   ---------------        ---------------
                                                            73,405                 72,878
         Less inventory obsolescence reserve                (6,356)                (6,652)
                                                   ---------------        ---------------

                                                   $        67,049        $        66,226
                                                   ===============        ===============
</TABLE>

LONG-TERM DEBT:

         The Company completed a private placement in the first quarter of
fiscal 1998 of $115.0 million 6.25% Convertible Subordinated Notes due in 2004.
Interest is payable semi-annually in March and September. The Notes are
subordinated to all existing and future senior indebtedness and effectively
subordinated to all liabilities, including trade payables and lease obligations
of the Company and its subsidiaries. The Notes can be converted after ninety
days from the original issuance into the Company's common stock at a conversion
price of $39.00 per share. The notes are not redeemable by the Company prior to
September 20, 2000.

         Proceeds have been utilized primarily for working capital purposes and
to repay the balance of the Company's revolving line of credit. Remaining
portions of proceeds may be used to expand the Company's sales and service
operations in Asia, to expand IPEC Precision's facilities and for general
corporate purposes including working capital and research and development.
Pending such uses, the Company intends to invest the net proceeds in
interest-bearing, investment grade securities. Debt issuance costs of $4.0
million incurred in connection with the private placement have been included in
other assets and are being amortized over seven years.




                                       9
<PAGE>   10
              INTEGRATED PROCESS EQUIPMENT CORP. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)


                         PART I - FINANCIAL INFORMATION

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

         The following information should be read in conjunction with the
condensed consolidated financial statements and notes thereto included in this
Quarterly Report and the audited Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations contained in the Company's Annual Report on Form 10-K for the year
ended June 30, 1998.

OVERVIEW

         IPEC is a Delaware corporation primarily engaged in designing,
manufacturing, marketing and servicing equipment for the semiconductor
manufacturing industry. The Company is organized into two principal divisions.
IPEC Planar manufactures CMP equipment and CMP-related products. IPEC Precision
manufactures advanced plasma-assisted chemical etch systems and metrology
equipment for use primarily in manufacturing silicon wafers and semiconductor
devices.

         The Company's revenue is derived from the sale of products and related
spare parts and service. The Company recognizes product and spare revenue when
the product or part is shipped. Service revenue is recognized ratably over the
term of service contracts or in some cases upon completion of service.

         The Company's gross margin has varied in the past and may vary
significantly in the future due to many factors and is especially dependent on
the percentage of sales through distributors, materials costs, product mix and
favorable terms given to customers to introduce new products, penetrate new
markets and accelerate purchases. The Company sells directly in the United
States, and such sales historically have had a higher gross margin than indirect
international sales. Gross margins in any period may not be indicative of
margins for future periods. Because IPEC Precision's customer base is new, the
Company believes that IPEC Precision's gross margin could be lower than the
gross margin for the Company's CMP tools. As new products are introduced by IPEC
Precision in future quarters, the Company's gross margin may decrease.

         IPEC incurred net losses of $10.1 million in the quarter ended
September 30, 1998, $42.3 million in fiscal 1998, $33.7 million in fiscal 1997
and $10.7 million in fiscal 1996. The Company's loss in the quarter ended
September 30, 1998 resulted primarily from a world-wide slowdown in the
semiconductor and silicon wafer manufacturing industries. The Company's fiscal
1998 net loss included a $25.9 million net charge to increase the valuation
allowance for the Company's deferred tax assets and a $10.6 million charge to
record an additional write-down of the assets in connection with the closure of
IPEC Clean. The Company's fiscal 1997 net loss included a $25.0 million 


                                       10
<PAGE>   11
              INTEGRATED PROCESS EQUIPMENT CORP. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)


charge (net of taxes) for estimated losses on disposal of IPEC Clean, a $3.6
million loss (net of taxes) from IPEC Clean operations of fiscal 1997, and a
$17.6 million pretax charge for asset write downs due to the discontinuation of
the Avanti 672 program development effort. The Company's fiscal 1996 net loss
included a one-time pretax charge of $37.0 million for the purchase of
in-process research and development in connection with the acquisitions of IPEC
Planar Portland and IPEC Precision.

         The Company expects to incur losses until semiconductor industry
conditions improve, especially in Asia, and order levels increase. Gross margins
in fiscal 1999 are expected to decline from fiscal 1998 due to the distribution
of fixed costs over a smaller revenue base. Although the Company has initiated
cost-containment measures and will continue to review its cost structure, these
measures alone are not expected to improve operating results to a profitable
level in fiscal 1999. A significant portion of the Company's operating expenses
is relatively fixed in nature and planned expenditures are based in part on
anticipated orders. Ongoing expenditures for product development, engineering
and customer support make it difficult to reduce expenses in a particular
quarter if the Company's sales projections for the quarter are not met. Any
inability to reduce spending quickly enough to mitigate any revenue shortfall
would magnify the adverse impact of the revenue shortfall on the Company's
results of operations.

RESULTS OF  OPERATIONS

         The following table sets forth for the periods indicated the results of
operations for the Company expressed as a percentage of total revenue.

<TABLE>
<CAPTION>
                                                                        PERCENT OF TOTAL REVENUE
                                                                    THREE MONTHS ENDED SEPTEMBER 30,
                                                                    ---------------------------------
                                                                         1997               1998
                                                                    -------------      --------------
<S>                                                                     <C>                <C>   
Revenue                                                                 100.0%             100.0%
Cost of goods sold                                                       56.7%              78.1%
                                                                    ---------          ---------
       Gross margin                                                      43.3%              21.9%
                                                                    ---------          ---------

Operating expenses:
    Research and development                                             13.1%              33.3%
    Selling, general and administrative                                  15.2%              33.0%
                                                                    ---------          ---------
       Total operating expenses                                          28.3%              66.3%
                                                                    ---------          ---------

       Operating income (loss)                                           15.0%             (44.4%)

Other income (expense):
    Interest income                                                        .4%               3.8%
    Interest expense                                                      (.9%)            (8.1%)
    Other, net                                                           --                  8.2%
                                                                    ---------          ---------
       Total other income (expense)                                       (.5%)              3.9%
                                                                    ---------          ---------

       Income (loss) from continuing operations before income taxes      14.5%             (40.5%)
Income tax expense                                                        5.4%               --
                                                                    ---------          ---------

       Net income (loss)                                                  9.1%             (40.5%)
                                                                    =========          =========

</TABLE>


                                       11
<PAGE>   12
QUARTER ENDED SEPTEMBER 30, 1998 COMPARED TO QUARTER ENDED SEPTEMBER 30, 1997

         Revenue. Revenue was $25.0 million for the quarter ended September 30,
1998 compared to $51.3 million for the quarter ended September 30, 1997. The 51%
decrease resulted from a reduction in revenue from Asia, where customers have
been unable to arrange for satisfactory financing terms, and from downturns in
the semiconductor and silicon wafer industries. The Company anticipates lower
revenue levels for fiscal 1999 compared to fiscal 1998 as a result of these
economic conditions. Revenue from international sales represented 43% and 30% of
total revenue for the quarters ended September 30, 1998 and 1997, respectively.

         Cost of goods sold. Cost of goods sold as a percentage of revenue
increased to 78.1% for the quarter ended September 30, 1998 from 56.7% for the
quarter ended September 30, 1997. This increase resulted primarily from
increased fixed manufacturing and field service expenses incurred to build,
support and service new products spread over a smaller revenue base.
Additionally, the Company incurred increased expenses for product installation
and process acceptance for the AvantGaard 776 in the quarter ended September 30,
1998. Because revenue is not expected to increase until conditions improve in
the semiconductor and silicon wafer industries, cost of goods sold as a
percentage of revenue is expected to remain high, adversely affecting gross
margins.

         Research and development. Research and development expense increased
24% for the quarter ended September 30, 1998 to $8.3 million from $6.7 million
for the quarter ended September 30, 1997. The Company is continuing to develop
the AvantGaard 676 and AvantGaard 776. Current development efforts also include
a 300mm integrated CMP system (the AvantGaard 876), plasma assisted chemical
etch systems, metrology technologies and copper and dual damascene CMP
processes. As a result of the economic downturn in the semiconductor and silicon
wafer industries, the Company has implemented cost reduction plans in
non-critical research and development projects. Research and development expense
for the quarter ended September 30, 1998 decreased to 15% from $9.7 million for
the immediately preceding quarter ended June 30, 1998.

         Selling, general and administrative. Selling, general and
administrative expenses increased 6% to $8.2 million for the quarter ended
September 30, 1998 compared to $7.8 million for the quarter ended September 30,
1997. The increase has resulted primarily from costs incurred to expand the
Company's international presence. Cost reduction programs including headcount
reductions, salary cuts among senior management, certain project reductions, and
lower sales commissions have partially offset this increase.

         Interest income and interest expense. Interest income increased to
$951,000 for the quarter ended September 30, 1998 from $203,000 for the quarter
ended September 30, 1997. Interest expense increased to $2.0 million for the
quarter ended September 30, 1998 from $473,000 for the quarter ended September
30, 1997. Increased interest income and expense amounts have resulted from
invested proceeds related to the $115.0 million, 6.25% Convertible Subordinated
Note financing completed in September 1997 and the related interest costs of the
debt.


                                       12
<PAGE>   13
         Other income, net. Other income increased to $2.1 million for the
quarter ended September 30, 1998 from $15,000 for the quarter ended September
30, 1997. This resulted from an insurance settlement for an AvantGaard 776
system that was damaged during shipment to a trade show.

         Income tax expense. The Company did not record an income tax benefit
for the quarter ended September 30, 1998, due to the uncertain nature of the
ultimate realization of a future tax benefit. The Company does not anticipate
recording income tax expense or benefits in fiscal l999. Income tax expense for
the quarter ended September 30, 1997 was $2.8 million.

LIQUIDITY AND CAPITAL RESOURCES

         The Company's principal sources of liquidity include cash, cash
equivalents and short-term investments of $71.1 million as of September 30,
1998, a decrease of $13.0 million from June 30, 1998. The decrease in cash, cash
equivalents and short-term investments in the first quarter of fiscal 1999
resulted primarily from operating losses incurred in the first quarter of fiscal
1999.

         As of September 30, 1998, the Company had $155.1 million of working
capital compared with $164.2 million as of June 30, 1998. The Company's accounts
receivable decreased to $39.3 million as of September 30, 1998 as compared to
$43.8 million as of June 30, 1998. The decrease in accounts receivable was
primarily due to lower levels of sales activity in the fourth quarter of fiscal
1998 and the first quarter of fiscal 1999 compared to the first, second and
third quarter of fiscal 1998. The Company's inventory decreased to $66.2 million
as of September 30, 1998 from $67.0 million as of June 30, 1998. Although the
decrease in inventory was relatively small, more significant reductions should
occur in future quarters as a result of reduced purchasing requirements. Reduced
purchasing by the Company also resulted in a decreased accounts payable balance
of $4.7 million at September 30, 1998 compared to $10.4 million at June 30,
1998.

         The Company's property, plant and equipment additions were $2.3 million
in the first quarter of fiscal 1999 compared to $5.7 million in the first
quarter of fiscal 1998. These additions consisted primarily of testing and
demonstration equipment related to the AvantGaard 676, 776 and 876 systems.

         Total long-term debt decreased to $118.3 million as of September 30,
1998 from $118.6 million as of June 30, 1998. Total long-term debt as a
percentage of stockholders' equity increased to 139% as of September 30, 1998
from 125% as of June 30, 1998.

         The Company believes that its cash, cash equivalents and short-term
investments will be sufficient to fund its operations for the foreseeable
future. The Company's cash needs depend on, among other things, the length of
the economic slowdown, the extent of future operating losses that will require
funding, additional working capital requirements, whether the Company is forced
by competitive pressures and commercial terms to continue or increase extended
terms for accounts receivable and whether the Company acquires other companies
or businesses. If the Company requires additional cash, there can be no
assurance that such additional financing will be available when needed, or, if
available, will be available on satisfactory terms. In order to raise capital,
the Company may issue debt or equity securities which could result in
substantial dilution. The failure 


                                       13
<PAGE>   14
to obtain additional financing when needed on satisfactory terms would also
hinder the Company's ability to invest in capital equipment and working capital.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

         In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes requirements for disclosure of
comprehensive income and becomes effective for the Company for the year ending
June 30, 1999. Comprehensive income includes such items as foreign currency
translation adjustments and unrealized holding gains and losses on available for
sale securities that are currently being presented by the Company as a component
of stockholders' equity.

         In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." SFAS No 131 establishes standards for
disclosure about operating segments in annual financial statements and selected
information in interim financial reports. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. This statement supersedes SFAS No. 14, "Financial Reporting for
Segments of a Business Enterprise." The new standard becomes effective for the
Company for the year ending June 30, 1999, and requires that comparative
information from earlier years be restated to conform to the requirements of
this standard.

RISK FACTORS

         If any of the following risks actually occur, the Company's business,
financial condition or results of operations could be materially adversely
affected. The risks and uncertainties described below are not the only ones
facing the Company. Additional risks and uncertainties not presently known to
the Company or that the Company currently deems immaterial may also impair the
Company's business operations.

         The Company Has Incurred Annual and Quarterly Losses. Prior to the
Company's acquisition of IPEC Planar Phoenix in fiscal 1994, the Company did not
have significant revenue. The Company had net losses of $10.7 million in fiscal
1996, $33.7 million in fiscal 1997, $42.3 million in fiscal 1998 and $10.1
million in the first quarter of fiscal 1999. The Company incurred a net loss of
approximately $36.9 million in the second quarter of fiscal 1997, due to charges
(net of taxes) of approximately $40.2 million for discontinuation of the
business of IPEC Clean and of a research and development program. In fiscal
1998, the Company incurred net charges of $25.9 million to increase the
valuation allowance for the Company's deferred tax assets and $10.6 million for
an additional write down of assets in connection with the closure of IPEC Clean.
The Company incurred a net loss of $10.1 million in the first quarter of fiscal
1999 as a result of a slowdown in the semiconductor and wafer manufacturing
industries.

         Quarterly Operating Results May Fluctuate. The Company's quarterly
operating results may fluctuate due to a variety of factors, including the
following:


                                       14
<PAGE>   15
         -    changes in the demand for semiconductors, particularly
              high-performance semiconductors with line widths under 0.35 micron
              and multiple layers, or for semiconductor capital equipment
              generally;

         -    the timing of significant shipments;

         -    accelerations, delays, cancellations or postponement of orders;

         -    the gain or loss of significant customers;

         -    competitive pressures;

         -    general economic conditions, especially in Asia;

         -    availability and costs of components from the Company's suppliers;

         -    the timing of product announcements and introductions and process
              qualifications by the Company, its customers or its competitors;

         -    the ability of the Company to manufacture, test and deliver
              products in a timely and cost-effective manner;

         -    the level of field service operations;

         -    the timing and structure of acquisitions and dispositions or
              spin-offs;

         -    changes in the mix of products sold;

         -    delayed or canceled construction of wafer fabrication facilities
              by customers;

         -    research and development expenses associated with new products;

         -    market acceptance of new or enhanced versions of the Company's and
              its customers' products;

         -    reductions in personnel;

         -    discontinuance of operations; and

         -    the sufficiency of personnel and capital resources to support
              operations.

         The Company has experienced adverse effects from some of these factors
in the past and may experience them in the future. The following are examples of
fluctuations in operating results due to these factors:

         -    In the second quarter of fiscal 1996, the Company incurred net
              losses due to one-time charges associated with the IPEC Planar
              Portland and IPEC Precision acquisitions.

         -    The Company incurred a net loss in the first quarter of fiscal
              1997, primarily due to a decline in demand for semiconductor
              capital equipment, the Company's lack of a high-throughput oxide
              process CMP system, unprofitable operations at IPEC Precision and
              increased cost of goods sold resulting from the issuance of
              warrants to a major customer.

         -    The Company incurred a net loss in the second quarter of fiscal
              1997, due to a $25.0 million charge (net of taxes) for estimated
              losses from the disposal of IPEC Clean and a $17.6 million pretax
              charge for asset write downs due to discontinuation of the
              Company's Avanti 672 product development effort.


                                       15
<PAGE>   16
         -    The Company incurred a net loss in the second quarter of fiscal
              1998 due to a $10.6 million charge for the remaining unsold net
              assets of IPEC Clean.

         -    Sales of the Company's CMP equipment were adversely affected by an
              industry-wide slowdown in the semiconductor equipment market in
              the second half of calendar 1996. The Company's revenue from sales
              of CMP equipment in each of the first three quarters of fiscal
              1997 was lower than such revenue in each of the first three
              quarters of fiscal 1996. Fiscal 1997 revenue was less than fiscal
              1996 revenue.

         -    Due to economic conditions in Asia, several Korean customers were
              unable to obtain satisfactory financing terms to allow them to
              place volume orders in fiscal 1998. The Company does not expect to
              receive significant volume orders from these customers for the
              remainder of calendar 1998.

         -    The semiconductor capital equipment market and silicon wafer
              manufacturing industry have experienced a slowdown during calendar
              1998. Industry analysts anticipate the slowdown will continue at
              least through the middle of calendar 1999. The Company incurred
              losses in the third and fourth quarters of fiscal 1998 and the
              first quarter of fiscal 1999 as a result of a decrease in orders.
              The Company currently anticipates that revenue in the second
              quarter of fiscal 1999 will be less than revenue in the first
              quarter of fiscal 1999 and that revenue in fiscal 1999 will be
              less than revenue in fiscal 1998.

         Results of operations in any period should not be considered indicative
of future results. Fluctuations in operating results may also result in
fluctuations in the price of the Company's Common Stock. In future quarters, the
Company's operating results may not meet the expectations of public market
analysts or investors. In such an event, the market price of the Common Stock
could be materially adversely affected.

         The Timing of Significant Shipments and Orders Can Affect Quarterly
Results. Most of the Company's revenue is derived from the sale of products in a
price range from $250,000 to $3.5 million per unit. As a result, the timing of
individual shipments can have a significant impact on the Company's results of
operations for a particular period. The Company has experienced order and
delivery delays and cancellations that caused the Company to miss its quarterly
revenue and profit projections. This occurred, for example, in the first quarter
of fiscal 1997.

         The Company may also attempt to influence the timing of certain
shipments. During the first quarter of fiscal 1997, a significant customer
agreed to accelerate shipment of certain orders into the first three quarters of
fiscal 1997. These accelerated orders represented 14% of the Company's revenue
in fiscal 1997. Cost of goods sold increased in the first three quarters of
fiscal 1997 by $657,000, $191,000 and $212,000, respectively, due to the
issuance of certain warrants in connection with this acceleration.

         Orders that the Company has included in its backlog may be delayed or
canceled. For example, the Company removed orders of approximately $12.0 million
from its backlog in the fourth quarter of fiscal 1997, primarily due to delays,
and ultimately suspension of construction of a wafer fabrication facility for
Submicron Systems in Thailand.


                                       16
<PAGE>   17
         The Semiconductor Industry Is Volatile. The Company depends upon
capital spending by semiconductor manufacturers, primarily for the opening or
expansion of semiconductor fabrication facilities to produce high-performance
semiconductors with line widths under 0.35 micron and with multiple layers.
Semiconductor manufacturers in turn depend upon current and anticipated market
demand for semiconductor devices and products utilizing such devices. The
semiconductor industry is highly cyclical and has experienced significant
overall growth in recent years, which has resulted in growth in the
semiconductor capital equipment industry. In certain instances, however,
industry downturns have lasted for extended periods of time. The semiconductor
industry currently has excess production capacity, which has caused
semiconductor manufacturers to decrease their capital spending. A shift in
demand from more expensive, high-performance personal computers to computers
priced under $1,000 has been partially responsible for the decreased
profitability of semiconductor manufacturers.

         Asian Economic Fluctuations Adversely Affect the Company. A substantial
portion of worldwide semiconductor manufacturing capacity is located in Asia.
Asian countries, particularly Japan and Korea, are experiencing banking,
currency and other difficulties that are contributing to economic slowdowns or
recessions in those countries. Due to currency fluctuations, the Company's U.S.
dollar denominated products have become relatively more expensive in certain
Asian countries. In the second half of fiscal 1998, several Korean customers
were unable to obtain satisfactory financing terms to allow them to place volume
orders. The Company believes that certain of these customers will be unable to
place volume orders for the remainder of calendar 1998. If Asian economies do
not recover, capital investment by Asian customers may continue to be adversely
affected.

         The Company Faces Intense Competition. The semiconductor equipment
industry is intensely competitive. The Company believes that direct domestic and
international competition in CMP polishing systems and clustered CMP polishing
and cleaning systems is likely to increase substantially. Several companies
currently market CMP systems that directly compete with the Company's systems,
including Applied Materials, Ebara, SpeedFam and Strasbaugh. Several
semiconductor manufacturers have been evaluating whether they will adopt the
Company's AvantGaard 676 or AvantGaard 776, particularly for the oxide process,
or comparable high-throughput products from the Company's competitors. Some of
the Company's major customers may wish to utilize different CMP suppliers for
different processes.

         In order to compete effectively in the semiconductor equipment
industry, a company must have resources to provide a broad range of product
offerings, to fund customer service and support on a worldwide basis and to
invest in both product and process research and development. Certain
competitors, including Applied Materials, provide customers with evaluation
tools and have substantially greater financial resources, name recognition and
more extensive engineering, manufacturing, marketing and customer service and
support capabilities than the Company. In addition, competitors, including
Applied Materials, that supply a broader range of semiconductor capital
equipment may have better relationships with semiconductor manufacturers,
including the Company's customers. The Company expects its current competitors
to continue to improve the design and performance of their existing products and
processes, and to introduce new products and processes with improved price and
performance characteristics. New product introductions or 


                                       17
<PAGE>   18
product announcements by the Company's competitors could cause a decline in
sales or adversely affect market acceptance of the Company's existing and new
products. Moreover, increased competitive pressure could lead to intensified
price based competition.

         Competition is increasing significantly in the market for
high-throughput planarization systems. Other capital equipment manufacturers not
currently involved in the development of CMP systems may also attempt to enter
and develop products for this market or to develop alternative technologies
which may reduce the need for the Company's products. For example, in 1997, Lam
Research, a semiconductor production equipment supplier, acquired OnTrak, a
manufacturer of wafer processing equipment that has developed a CMP tool.
Furthermore, manufacturers may develop alternatives to CMP or may enhance
existing manufacturing techniques to achieve acceptable yields for DRAMs and
other integrated circuits involving three or more metal layers and line widths
at or below 0.35 micron.

         The Company Depends on a Small Number of Major Customers. A small
number of customers account for a significant percentage of the Company's orders
and revenue. In fiscal 1998, Intel represented 38% and Tokyo Electron
represented 12% of the Company's revenue. In fiscal 1997, Intel represented 51%
of the Company's revenue. In fiscal 1996, Intel represented 35% and IBM
represented 11% of the Company's revenue. The Company anticipates that its
revenue will continue to depend on a limited number of major customers. The
companies considered to be major customers and the percentage of the Company's
revenue represented by each major customer, however, may vary from quarter to
quarter. Several semiconductor manufacturers have been evaluating the Company's
AvantGaard 676 and AvantGaard 776, against comparable tools. The loss of a major
customer, any material reduction in orders by major customers, including
reductions due to market or competitive conditions or the determination of any
major customer not to adopt the Company's next-generation products, would have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company's future success also depends in part upon
its ability to obtain orders from new customers, as well as the financial
condition of its customers.

         The Company Depends on Broader Industry Acceptance of CMP and the
AvantGaard 676 and AvantGaard 776. The CMP process has not been broadly adopted
by semiconductor manufacturers for volume production. The Company defines
semiconductor manufacturers using CMP in volume production as companies using
ten or more CMP systems. Most semiconductor manufacturers that have CMP
equipment use it only for pilot line production or research and development. Few
semiconductor manufacturers produce commercial quantities of ICs using CMP
machines. To date, the Company's products have been used primarily to
manufacture advanced semiconductor logic and memory devices. Although industry
analysts have projected significant future growth for the CMP polisher market,
these projections depend on the analysts' assumptions, and variations in
industry demand can occur during the several years included in the projections.
Projected industry growth may not occur and additional semiconductor
manufacturers may decide not to adopt CMP processes for volume production.

         The Company's future results depend on sales of the AvantGaard 676,
AvantGaard 776 and Avanti 472 CMP wafer polishing systems. The Avanti 372M CMP
wafer polishing system is based 


                                       18
<PAGE>   19
on older technology and is sold primarily to one customer, with shipments
expected only through fiscal 1999. Because shipments of the Avanti 372M are
limited and the Avanti 472 does not offer the same throughput or footprint as
the AvantGaard 676 or AvantGaard 776 or other high-throughput CMP systems, the
Company expects it will increasingly rely on sales of the AvantGaard 676 and
AvantGaard 776 in the future. The AvantGaard 776 was designed to integrate CMP,
metrology and wafer cleaning in a single unit with both oxide and metal
capability. The Company's oxide process for the AvantGaard 676 and AvantGaard
776 was recently developed and has not been widely accepted. Several customers
are qualifying new production level oxide CMP processes for these systems. The
Company believes that the oxide processes are being used in production by a very
limited number of customers.

         The Company's future results also depend to a lesser extent on sales of
IPEC Precision's products, which are currently oriented toward semiconductor
wafer manufacturers and have not been widely adopted by these or other
semiconductor industry customers. The current global oversupply of silicon
wafers may adversely affect sales of wafer shaping equipment to silicon wafer
manufacturers. Customers may not accept these products and these products may
not be sold profitably or in volume.

         The Company Must Develop New Products Due to Technological Change.
Semiconductor manufacturing equipment and processes are subject to rapid
technological changes and product obsolescence. The Company believes that its
future success will depend in part upon its ability to enhance its existing
products, develop new products and qualify new processes on its CMP systems to
address technological changes and customer requirements. For example, the
Company is developing a 300 mm CMP system to address future needs of
semiconductor manufacturers. The Company currently derives most of its revenue
from sales of CMP equipment and related products by IPEC Planar. The Company's
strategy depends in part on developing and introducing products that lower the
semiconductor manufacturer's cost of ownership, which involves a number of
factors, including product acquisition and operating expenses, throughput,
reliability, footprint and wafer yields. Failure to successfully develop new
products would affect the Company's future success.

         Product or Process Development Difficulties Could Adversely Affect the
Company's Results of Operations. The Company's current development efforts
include the AvantGaard 876 300 mm wafer CMP system, plasma-assisted chemical
etch systems, metrology technologies and copper and dual damascene processes.
Semiconductor equipment companies often experience delays in completing advanced
products and processes. In the past, the Company has experienced delays in
developing new CMP tools and processes and plasma-assisted chemical etch
systems. Due to the complexity and sophistication of the Company's products and
related automation software, the Company's products from time to time may
contain defects or "bugs" that can be difficult to correct. The Company may not
be able to identify and correct defects in a timely manner. IPEC Precision may
require a large amount of capital in order to commercialize its current products
and products under development. If any of the Company's products are not
commercialized in a timely manner, the Company could be required to write off
inventory and other assets related to those products and the Company could lose
customers and revenue. For example, the Company incurred a $17.6 million pretax
asset write off in the second quarter of fiscal 1997 for discontinuance of the
Avanti 672 product development program. To the extent products developed by the
Company are 


                                       19
<PAGE>   20
based upon anticipated changes in semiconductor production technologies, sales
for such products may be adversely affected if other technology becomes accepted
in the industry.

         The Company is Subject to Risks Associated with International Sales.
International sales accounted for approximately 46% of the Company's revenue in
fiscal 1998 and 27% in fiscal 1997. The Company expects that international sales
will continue to account for a significant portion of its revenue in future
periods. International sales are subject to certain risks, including tariffs,
embargoes and other trade barriers, staffing and operating foreign sales and
service operations, managing distributors and collecting accounts receivable.
These risks will increase as the Company establishes a fully-staffed Asia
Pacific division to service the Asian market. A direct presence in these
markets, particularly Japan, may also adversely affect the Company's
relationship with its current distributors. The Company is also subject to risks
associated with regulations relating to the import and export of technology
products. Laws limit the export of the Company's products to certain countries.
The Company cannot predict whether quotas, duties, taxes or other charges or
restrictions upon the importation or exportation of the Company's products in
the future will be implemented by the United States or any other country.

         Fluctuations in currency exchange rates could cause the Company's
products to become relatively more expensive to customers in a particular
country, leading to a reduction in sales or profitability in that country.
Although the Company's sales are currently denominated only in U.S. dollars,
future international activity may result in foreign currency denominated sales.
Gains and losses on the conversion to U.S. dollars of accounts receivable and
accounts payable arising from international operations may contribute to
fluctuations in the Company's results of operations.

         Future Acquisitions May Require Significant Resources and Adversely
Affect Results. Part of the Company's strategy is to acquire complementary
products, technologies or businesses. This may cause a disruption in the
Company's ongoing business and distraction of management and other resources. An
acquisition could absorb substantial cash resources, require the Company to
incur or assume debt obligations, or involve the issuance of Common Stock, which
could dilute the Company's existing stockholders. An acquisition which is
accounted for as a purchase, like the Company's past acquisitions, could involve
significant one-time charges, or could involve the amortization of intangible
assets, which would adversely affect earnings in the period(s) incurred. An
acquired entity may have unknown liabilities, and its business may not achieve
the results anticipated at the time of the acquisition.

         The Company's previous acquisitions have resulted in significantly
higher operating expenses because the Company initially operated each acquired
business independently, resulting in separate marketing, customer support and
administrative functions. The companies acquired generally had not operated
profitably before their acquisition by IPEC. IPEC Clean, acquired in fiscal
1995, had never operated profitably, was discontinued by the Company in fiscal
1997 and closed in the third quarter of fiscal 1998, resulting in a $25.0
million charge (net of taxes) in fiscal 1997 and a $10.6 million charge in
fiscal 1998. IPEC Precision has not achieved significant revenue from shipments
of production equipment.


                                       20
<PAGE>   21
         The Company Would be Adversely Affected if Suppliers Could Not Deliver
Goods and Services. The Company relies on a limited number of independent
manufacturers to provide certain components in assemblies made to the Company's
specifications and used in the Company's products. If the Company's
subcontractors were to experience financial, operational, production or quality
assurance difficulties that resulted in the reduction or interruption of supply
to the Company, the Company's financial and operating results would be
materially adversely affected. In addition, the Company purchases certain key
components from qualified vendors for which alternative qualified sources are
not currently available. A prolonged inability to obtain adequate amounts of
qualified components would also adversely affect the Company's financial and
operating results.

         The Company Depends on its Key Personnel. The Company's success is
dependent upon its ability to attract and retain qualified management,
technical, sales and support personnel. There is intense competition for such
personnel, particularly in Phoenix, Arizona, which has a relatively low
unemployment rate, and the Company may experience difficulty in hiring skilled
personnel. During July and October 1996, and in April, July and September 1998,
the Company laid off employees to reduce its expenses and may do so in the
future. Repeated layoffs could adversely affect the retention of employees and
could adversely affect the Company's ability to hire new personnel in the
future. Personnel reductions at IPEC Precision included technical personnel, who
could be difficult to replace if IPEC Precision successfully markets its
products and requires additional engineering staff to support customers.

         The Company Depends on Proprietary Technology, and Protection is
Uncertain. The Company's success depends significantly on proprietary
technology. Patents issued to the Company may not provide the Company with
meaningful advantages and may be challenged. To the extent that a competitor of
the Company is able to reproduce or otherwise capitalize on the Company's
technology, it may be difficult or impossible for the Company to obtain
necessary intellectual property protection in the United States or other
countries where such competitor conducts its operations. Moreover, the laws of
foreign countries may not protect the Company's intellectual property to the
same extent as the laws of the United States.

         The Company also relies on trade secrets that it seeks to protect, in
part, through confidentiality agreements with employees and other parties. These
agreements may be breached, and the Company may not have adequate remedies for
any such breach. The Company's trade secrets may also become known to or
independently developed by others.

         The Company is Subject to Infringement Claims. Similar to other
technology companies, the Company may from time to time receive notice of claims
of infringement of other parties' proprietary rights. If any Company product is
found to infringe the rights of others, a court may grant an injunction to
prevent making, selling or using the product in the applicable country. The
Company may seek to obtain a license of such third party's intellectual property
rights, which may not be available under reasonable terms or at all. Expensive
and time-consuming litigation may be necessary to enforce patents issued to the
Company, to protect trade secrets or know-how owned by the Company, to defend
the Company against claimed infringement of the rights of others and to
determine the scope and validity of proprietary rights of others.


                                       21
<PAGE>   22
         The Company Has Placed Its Technology in Escrow Under a Significant
License Agreement. The Company manufactures the AvantGaard 676 under a license
from a volume manufacturer of advanced microprocessors. The Company has escrowed
technical data sufficient to permit such manufacturer to manufacture the
Company's AvantGaard 676. The data may be released from escrow if the Company
does not meet certain criteria regarding product or spare part delivery
schedules to the manufacturer. If the data were to be released from escrow, the
semiconductor manufacturer could manufacture the AvantGaard 676 or have the
AvantGaard 676 manufactured by others for its use, which would have a material
adverse effect on the Company's business, financial condition and results of
operations. 

         The Company is Exposed to Product Liability and Environmental
Regulations. The Company may be subject to product liability claims, as well as
the risk that harmful substances will escape into the workplace or the
environment and cause damage or injuries. The Company's products could
malfunction in the future and damage a customer's facilities and harm its
employees. The Company and its customers are subject to stringent federal, state
and local regulations governing the storage, use, discharge and disposal of
toxic, volatile or otherwise hazardous chemicals used in their manufacturing
operations. Current or future regulations could require the Company or its
customers to make substantial expenditures for preventive or remedial action,
reduction of chemical exposure or waste treatment or disposal.

         Certain Anti-Takeover Provisions May Discourage Change in Control.
Various factors could discourage certain types of transactions involving an
actual or potential change in control of the Company, including transactions in
which the holders of Common Stock who are not officers and directors might
otherwise receive a premium for their shares over then current prices. These
factors include the following:

         -    Certain shareholders have outstanding rights to elect members of
              the Company's Board of Directors.

         -    The Company's Certificate of Incorporation authorizes the
              Company's Board of Directors to issue additional Preferred Stock
              and to determine their rights, preferences and privileges, without
              further vote or action by its stockholders. Pursuant to Delaware
              corporate law, the approval of the holders of outstanding
              Preferred Stock may be required for certain corporate actions. Any
              series of Preferred Stock that the Company may issue in the future
              could participate in these class voting rights and may have
              additional independent rights to approve certain actions. The
              Company adopted a stockholder rights plan in May 1997.

         -    The Company is subject to Delaware General Corporation Law, which
              restricts certain business combinations with interested
              stockholders.

         The Company's Common Stock Price is Volatile. The market price of the
Company's Common Stock has been, and may continue to be, extremely volatile. The
market price of the Company's Common Stock may be significantly affected by a
number of factors, including:

         -    actual or anticipated fluctuations in the Company's financial
              results or of other companies in the semiconductor industry;


                                       22
<PAGE>   23
         -    announcements by the Company or its competitors regarding new
              products;

         -    changes in financial estimates by securities analysts;

         -    general market conditions.

In addition, the stock market has experienced extreme volatility affecting the
market price for many technology companies that often has been unrelated to the
operating performance of particular companies. In the past, following periods of
volatility in the market price of a company's securities, securities class
action litigation has often been brought against that company. Such litigation,
if brought against the Company, could result in substantial costs and a
diversion of management's attention and resources.

         The Company May Need to Raise Capital on Unfavorable Terms. The Company
believes that its cash, cash equivalents, and short-term investments are
sufficient to support its operation through the foreseeable future. Additional
new debt or equity financing may be required to fund the Company's growth, which
may result in substantial dilution. The failure to obtain additional financing
when needed on satisfactory terms would also hinder the Company's ability to
make continued capital investments.

         The Company Faces Year 2000 Computer Issues. Many companies face
potentially serious computer problems because most software written in the past
will not properly recognize calendar dates beginning in the year 2000. This
could cause computers to either shut down or lead to incorrect calculations. The
Company has identified the changes required to its computer programs and
hardware. The necessary modifications to the Company's centralized financial,
customer, and operational information systems are expected to be completed by
the end of calendar 1998. Noncentralized systems, such as software used to
operate the Company's products, are currently being reviewed for Year 2000
problems. Modifications to software used to operate the Company's products are
expected to be completed by the end of calendar 1998. Modifications to other
noncentralized systems are expected to be completed in early calendar 1999. The
Company expects to incur costs to remedy year 2000 problems in the future,
primarily for non-business systems such as software used to operate the
Company's products. The Company does not currently anticipate these costs will
be material. If the Company or third parties with whom it has relationships were
to cease or unsuccessfully complete their year 2000 remediation efforts, the
Company may encounter disruptions in its business. The Company has not currently
established a formal year 2000 contingency plan but will consider and, if
necessary, address doing so as part of its year 2000 review process. The Company
maintains and deploys contingency plans designed to address various other
potential business interruptions. These plans may address interruptions
resulting from third parties' failure to be year 2000 ready.

         Description of Forward-looking Statements. This Form 10-Q contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that are
subject to the "safe harbor" created by those sections. These forward-looking
statements include, but are not limited to, statements concerning gross margin
in 1999 and for IPEC Precision; losses; cost-containment measures; revenue in
fiscal 1999 and the second quarter of fiscal 1999; cost of goods sold; research
and development expense; 


                                       23
<PAGE>   24
income tax expense in 1999; inventory; sufficiency of the Company's capital
resources; ability of Korean customers to place orders; future trends and growth
in the semiconductor capital equipment market, silicon wafer manufacturing
industry, semiconductor device market and CMP equipment market; competition;
establishment of an Asia-Pacific division; and year 2000 issues.

         These forward-looking statements may be found in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Risk Factors." Forward-looking statements not specifically set forth above may
also be found in these and other sections of this Form 10-Q. The Company's
actual future results could differ materially from those discussed in the
forward-looking statements as a result of certain factors, including those
discussed in the "Risk Factors" and elsewhere in this Form 10-Q.


                                       24
<PAGE>   25
ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K

         (a)   Exhibits

              10.1    Executive Employment Agreement between the Company and
                      Ralph Hartung effective August 10, 1998.
              27      Financial Data Schedule
         (b)   Reports on Form 8-K

              A report on Form 8-K was filed on July 10, 1998 reporting (under
              Item 5) earnings for the quarter ended June 30, 1998.

              A report on Form 8-K was filed on August 17, 1998 reporting (under
              Item 5) financial results for its fourth quarter and fiscal year
              ended June 30, 1998.


                                       25
<PAGE>   26
SIGNATURES



         Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.


Date: November 13, 1998                         INTEGRATED PROCESS EQUIPMENT
                                                CORP. AND SUBSIDIARIES


                                                By: /s/ John S. Hodgson
                                                    -------------------
                                                    John S. Hodgson
                                                    Vice President
                                                    and Chief Financial Officer


                                       26
<PAGE>   27


                            Exhibits Index

              10.1    Executive Employment Agreement between the Company and
                      Ralph Hartung effective August 10, 1998.

              27      Financial Data Schedule