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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
 
                            ------------------------
 
   
                                 FORM 10-K/A-1
    
 
                            ------------------------
 
(Mark One)
 
               [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                    FOR THE FISCAL YEAR ENDED JUNE 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)
 
<TABLE>
<S>                                              <C>
                    DELAWARE                                        77-0296222
          (State or other jurisdiction                           (I.R.S. Employer
       of incorporation or organization)                      Identification Number)
 
          911 BERN COURT, SAN JOSE, CA                                95112
    (Address of principal executive office)                         (Zip Code)
</TABLE>
 
       Registrant's telephone number, including area code: (408) 436-2170
        Securities registered pursuant to Section 12(b) of the Act: None
          Securities registered pursuant to Section 12(g) of the Act:
                     COMMON STOCK, $.01 PAR VALUE PER SHARE
                                (Title of Class)
 
     Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
                              Yes [X]      No [ ]
 
     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K/A-1 or any
amendment to this Form 10-K/A-1. [ ]
 
     The aggregate market value of the voting stock of the issuer held by
non-affiliates of the issuer on September 15, 1998 was approximately $122.3
million, based upon the closing price of such stock on that date.
 
     As of September 23, 1998, 17,839,793 shares of Common Stock and 7,186
shares of Class A Common Stock of the registrant were outstanding. The Common
Stock and Class A Common Stock are essentially identical, except that the Class
A Common Stock has four votes per share and the Common Stock has one vote per
share. See Item 5 -- "Market for Registrant's Common Equity and Related
Stockholder Matters."
 
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<PAGE>   2
 
                                     PART I
 
ITEM 1.  BUSINESS
 
     Integrated Process Equipment Corp. ("IPEC" or the "Company") is a leading
supplier of chemical mechanical planarization ("CMP") systems used in the
manufacture of semiconductors. CMP combines an abrasive slurry and mechanical
pressure to flatten the surface of a silicon wafer after each layer of
conducting metal or insulating oxide is deposited on the wafer. CMP creates a
flatter surface, which increases the precision with which photolithography can
imprint multiple layers of circuit diagrams and reduces wafer defects in the
production of advanced semiconductors. The Company believes that CMP is
increasingly necessary for semiconductor manufacturers to achieve adequate
yields and to increase revenue per wafer as advanced semiconductors are designed
with four or more metal layers and line widths at or below 0.35 micron. IPEC
believes that at least 29 semiconductor manufacturers worldwide use CMP systems
in volume production of advanced ICs. IPEC's CMP systems are used to manufacture
advanced microprocessors such as Intel's Pentium, Pentium Pro and Pentium II and
Motorola's PowerPC, advanced memory products such as DRAMs produced by IBM and
Siemens and other ICs such as ASICs and other logic products manufactured by
Intel, IBM, LSI Logic and Motorola. The Company also manufactures advanced
plasma-assisted chemical etch systems and metrology equipment for use primarily
in manufacturing silicon wafers and semiconductor devices.
 
     The Company is organized into two principal divisions. IPEC Planar, Inc.
("IPEC Planar") manufactures CMP equipment and CMP-related products. IPEC
Precision, Inc. ("IPEC Precision") manufactures advanced plasma-assisted
chemical etching equipment and metrology equipment for use primarily in
manufacturing silicon wafers and semiconductor devices.
 
INDUSTRY BACKGROUND
 
     Demand for semiconductors is driven largely by the growth of existing
computer and communications markets and the emergence of new segments in these
markets, such as multimedia, portable computing and wireless communications.
Semiconductor demand is also fueled by the development of more complex, higher
performance integrated circuits ("ICs") at reduced cost per function. The
production of these more complex and higher performance ICs requires more
advanced and expensive wafer fabrication equipment. Today's advanced wafer
fabrication facility costs in excess of $1 billion to construct, with more than
two-thirds of this cost allocated to equipment.
 
     Semiconductor manufacturers have capitalized on advances in semiconductor
equipment technology to produce increasingly complex ICs at lower cost.
Semiconductor manufacturers use circuit designs with more layers of metal and
finer line widths to produce ICs that can provide more functionality, operate at
higher speeds, occupy less space and consume less power. For example, in 1989,
the Intel 386 microprocessor was produced with two layers of metal and 0.8
micron line widths, and 4-megabit DRAMs were produced using two metal layers and
1.0 micron line widths. Today's advanced microprocessors are produced with six
to eight metal layers at 0.25 micron line widths or less, and 256-megabit DRAMs
will be produced using three metal layers at 0.25 and 0.18 micron line widths.
Requirements for higher quality and fewer defects are accelerating with minimum
dimensions. CMP is an enabling technology that significantly decreases wafer
defectivity and thus improves chip yield. Improvements in IC design,
performance, and yield have increased the potential value of each wafer.
 
     The production of advanced semiconductor wafers typically includes
alternating steps of deposition, etching and cleaning, where multiple layers of
highly complex circuit designs are built on the wafer substrate. These steps are
repeated numerous times in order to layer different materials and imprint
various features on the wafer. However, repeated deposition and etching
processes create an uneven topography on the wafer surface. At line widths at or
below 0.5 micron, topographical variations can prevent precise resolution during
photolithography, which leads to wafer defects and reduced yields. In addition,
for complex devices with multiple layers of metal, the etching process typically
leaves metal residues that can produce short circuits when other metal layers
are deposited. Due to the manufacturing obstacles involved and the increased
 
                                        1
<PAGE>   3
 
potential value of each wafer, semiconductor manufacturers are placing greater
emphasis on wafer processing equipment that increases yields and revenue per
wafer.
 
     As complex ICs are produced with multiple layers of metal and at line
widths at or below 0.35 micron, planarization is increasingly necessary after
each deposition or etching step to achieve adequate yields and revenue per
wafer. Traditional planarization techniques deposit additional dielectric
material to fill gaps and etch the dielectric layer to remove bumps, or apply a
glass-like material to fill gaps. However, these methods achieve a relatively
smooth surface for only a small area of the wafer. Consequently, these
traditional techniques have not proven effective for achieving adequate
planarity across an entire wafer to allow consistent imaging of devices with
line widths at or below 0.35 micron. In contrast, CMP, originally used to polish
optical lenses and bare silicon wafers, results in a uniformly planar surface by
combining abrasive slurry and mechanical pressure to remove excess dielectric
material and metal residues. CMP enables semiconductor manufacturers to develop
advanced semiconductor designs with more layers of metal and finer line widths.
At the same time, CMP reduces the cost to manufacture these more advanced ICs by
increasing yields. Consequently, the growth of the CMP market is driven by the
demand for continually more complex, high performance ICs at reduced cost per
function.
 
PRODUCTS AND TECHNOLOGIES
 
  IPEC Planar
 
     IPEC co-developed the use of CMP for wafer processing with a major
semiconductor manufacturer. The Company's core CMP technologies include precise
mechanical controls for wafer and pad positioning, movement and pressure; wet
chemistry and fluid dynamics related to temperature and flow; pad
reconditioning; electrical design in a wet chemistry environment; and control
software with a graphical user interface.
 
     The Company's current CMP systems are automated tools for uniformly
planarizing oxide and metal layers on silicon wafers from four to eight inches
in diameter. The systems are designed to perform planarizing applications
requiring process flexibility with repeatable results. The Company currently
manufactures four wafer planarization systems: the AvantGaard 776, the
AvantGaard 676, the Avanti 472 and the Avanti 372M. The Company's CMP systems
are configured to match varying customer requirements and offer different
throughput levels and ease of use. The list price of IPEC's present CMP systems
ranges from $475,000 to $3.5 million depending on configuration and options.
Sales of the Company's CMP stand-alone polishing systems accounted for
approximately 76% of the Company's total revenue in fiscal 1998 and 72% in
fiscal 1997.
 
  High Throughput Orbital CMP Systems
 
     IPEC's next-generation, high-throughput CMP systems incorporate an advanced
orbital polishing technique developed in conjunction with a major semiconductor
manufacturer. Planarization in these systems is achieved by the downward
pressure from and rotational motion of the upper wafer carrier against the
orbital motion of the lower polishing platen, which has a polishing pad attached
to its surface. The use of orbital polishing technology reduces edge exclusion,
allowing more of the wafer surface to be used; requires less downward pressure
on the wafer, significantly improving planarization performance; and provides
improved polish uniformity characteristics in a smaller footprint tool.
Moreover, the Company's next-generation systems incorporate an innovative polish
slurry dispense method that delivers the slurry through the polishing pad
directly to the wafer surface. This slurry delivery method is designed to
increase throughput and improve process control and planarity, and therefore
yield, as well as reduce the consumption of slurry compared to conventional
methods which deposit slurry on the pad surface.
 
     Wafer carrier rotation and platen orbit speeds are programmable to permit
control of the rate of material removal during system operation. Control of
these speeds, combined with precise delivery of slurry, enables the system to
deliver repeatable polishing results. System operation is controlled from a
centrally-located graphical user interface. A number of process programs can be
stored in memory to allow quick selection of desired process parameters for
different wafer sizes, materials or processes. While these next-generation
systems are designed to operate automatically, they also permit manual control.
 
                                        2
<PAGE>   4
 
     AvantGaard 776 Automatic Wafer Planarization System.  First shipped in the
fourth quarter of fiscal 1997, the AvantGaard 776 features four independent
heads, allowing simultaneous polishing of four wafers and enabling throughput of
50 or more wafers per hour. The AvantGaard 776 is designed to improve yields by
use of an orbital polishing motion rather than conventional rotational CMP
techniques. The AvantGaard 776 integrates CMP, metrology and wafer cleaning in a
single unit that requires less clean room space than separate CMP and post-CMP
cleaning equipment. This next-generation CMP tool is capable of polishing either
oxide or metal layers.
 
     AvantGaard 676 Automatic Wafer Planarization System.  The AvantGaard 676 is
based on the same four-head orbital polishing technology as the AvantGaard 776
and offers one of the industry's smallest footprints. This high-throughput
system is capable of polishing either oxide or metal layers and processing 40 or
more wafers per hour. Prior to its introduction to the open market in April
1996, the AvantGaard 676 was shipped only to the customer with which it had been
co-developed. The AvantGaard 676 was initially designed solely to planarize
metal layers and has been adopted for this purpose in volume production by a
majority of the customers that have purchased the system. An oxide process for
the AvantGaard 676 and 776 was developed in fiscal 1997 and a small number of
customers have adopted this process for volume production to date. The Company
is currently developing additional oxide processes for use by other customers
and is also developing a copper and dual damascene process.
 
  Rotational CMP Systems
 
     IPEC's rotational CMP products feature automatic cassette loading and
unloading, two-step planarizing and temperature, pressure and surface speed
control and pad conditioning. Planarization in the Company's rotational CMP
systems is achieved by pressure and three relative wafer motions: the wafer
chuck rotates about its center, the arm supporting the wafer chuck oscillates,
and the polishing plate (which has a polishing pad laminated to its surface)
rotates. This combination of pressure and motion allows uniform material removal
and flatness across the entire wafer surface and from wafer to wafer.
 
     Wafer carrier and platen rotation speeds are programmable to allow control
of wafer rotation speed during the planarizing operation. The rotation speeds
work in tandem with programmable arm oscillation and chemical slurry supply.
System operation is controlled from a centrally located programmable control
panel. A number of process programs can be stored in memory to allow quick
selection of stored process parameters for different wafer sizes, materials or
processes. While the system normally operates automatically, with the computer
program controlling all operating variables, the system also allows for manual
control.
 
     Avanti 472 Automatic Wafer Planarization System.  The Avanti 472,
introduced in 1994, is a fully automated, single-side, single wafer
planarization system for polishing oxide or metal layers on silicon wafers from
four to eight inches in diameter. In addition to the planarization of oxide
layers, the system polishes layers of metal interconnects, including tungsten,
aluminum and copper. The Avanti 472 offers higher throughput and improved
ergonomics over the previous generation 372M, as well as an improved pad
conditioner system.
 
     Avanti 372M Automatic Wafer Planarization System.  The Avanti 372M,
introduced in 1992, is similar to the Avanti 472. The 372M is sold primarily to
one customer.
 
  IPEC Precision
 
     IPEC Precision first applied its proprietary plasma-assisted chemical
etching ("PACE") and optical metrology technologies to silicon wafer processing
in 1992 with the development of AcuThin silicon-on-insulator ("SOI") wafers. The
PACE process operates at relatively high pressure and employs a spatially
confined plasma substantially smaller than a wafer's surface. A scanning
mechanism is used to control material removal at each location on the wafer by
varying the amount of time the plasma tool dwells at each point. In 1997, the
Company entered into an agreement with MEMC Electronic Material, Inc. to develop
a family of wafer shaping tools using IPEC's plasma-based planarization and
metrology technology.
 
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<PAGE>   5
 
     SOI-200 Wafer Thinning System.  The SOI-200 is a proprietary system used to
etch thin-bonded SOI wafers to high levels of precision and uniformity. This
system uses plasma-assisted chemical etching and incorporates a thin film mapper
to attain SOI dimensions which the Company believes cannot be achieved
economically with conventional etching technologies.
 
     AcuMap II.  The AcuMap II is a stand-alone thin film thickness metrology
instrument based on the thin film mapper in the SOI-200 system. AcuMap II uses a
spectral reflectometry system to perform rapid whole wafer dielectric thin film
thickness visualization by measuring up to 30,000 points in 90 seconds.
 
     Precision Wafer Shaper.  The Precision Wafer Shaper employs PACE technology
to produce ultra-flat bulk silicon wafers, improving wafer flatness and reducing
manufacturing cost. The first system, the PWS-200, designed to process six-inch
and eight-inch wafers, was shipped to a leading wafer manufacturer in December
1996. An enhanced version, the PWS-300, is being marketed to a limited number of
leading wafer manufacturers for processing 300 mm wafers to the device
industry's goal of wafers which have less than 0.25 micron variation in
thickness across the entire wafer.
 
     IPM Series.  The IPM Series utilizes spectral reflectometry and proprietary
algorithms to determine the thickness of dielectric thin films. The IPM Series
is designed to maintain the host machine's original throughput and footprints,
while reliably delivering accurate repeatable film thickness measurements to the
host computer.
 
CUSTOMERS
 
     The Company sells its products to leading semiconductor manufacturers
located throughout the United States, Asia and Europe. Through June 30, 1998,
the Company had sold approximately 900 CMP systems to more than 75 semiconductor
manufacturers, including AMD, Anam, Cypress Semiconductor, Fujitsu, Hitachi,
Hyundai, IBM, Intel, LG Semicon, LSI Logic, Micron, Motorola, NEC, Samsung,
SGS-Thomson, Siemens, SMST, Texas Instruments and UMC. Semiconductor
manufacturers using IPEC's CMP systems in volume production include Cypress
Semiconductor, IBM, Intel, LSI Logic, Motorola, Siemens, SMST and Texas
Instruments. IPEC Precision's products have only been sold to a limited number
of customers to date.
 
     Intel represented 38% and 51% of the Company's fiscal 1998 and 1997
revenue, respectively. Tokyo Electron Limited, represented 12% of the Company's
fiscal 1998 revenue. Intel and IBM represented 35% and 11%, respectively, of the
Company's fiscal 1996 revenue.
 
MARKETING, SALES AND SUPPORT
 
     IPEC Planar and IPEC Precision market products in the United States through
independent sales forces. Each subsidiary's direct sales force develops orders,
coordinates distribution, demonstrates equipment and provides applications
support.
 
     The Company markets its products internationally through independent
distributors in Europe, Israel and Asia. In Japan, Tokyo Electron Limited sells
and distributes certain CMP products. The Company is investing resources in
establishing a fully-staffed Asia Pacific division. The Company's primary
distributor in Europe is Teltec. The Company also has several nonexclusive
distributors in Europe. Sales outside the United States during fiscal 1998 and
1997 represented approximately 46% and 27%, respectively, of the Company's
revenue.
 
MANUFACTURING
 
     IPEC has manufacturing facilities in Phoenix, Arizona; Portland, Oregon;
and Bethel, Connecticut. The Company manufactures a majority of the more complex
plastic and metal components of its CMP products using both automated and
manually-operated plastic and metal fabrication equipment. IPEC purchases other
components from third parties and assembles and tests products configured by
customers for particular orders. The Company's manufacturing strategy
increasingly emphasizes outsourcing of components and subassemblies. The
warranty for the Company's products is up to two years for parts and labor from
post-installation customer acceptance.
 
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<PAGE>   6
 
RESEARCH AND DEVELOPMENT
 
     The semiconductor capital equipment market, and in particular the CMP
market in which the Company competes, is characterized by rapid technological
development and product innovation. The Company's research and development
efforts are currently focused on product and process development, automation,
improved reliability, machine control software, safety, man-machine interfaces,
maintainability and metrology. 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. Research and
development expenditures for fiscal 1998 and 1997 were $33.5 million and $24.0
million, respectively.
 
     In order to respond to developing technologies in the semiconductor
manufacturing industry, the Company intends to maintain its internal development
efforts and to seek cooperative research and product development relationships
with other technology companies and government agencies. In 1998, the Company
and Novellus Systems, Inc. ("Novellus") agreed to develop and demonstrate a
complete integrated solution for copper and dual damascene interconnect
structures used in next-generation semiconductor devices. IPEC intends to work
with Novellus to resolve the CMP and deposition integration issues customers
will encounter in the transition to these higher performance copper devices. ICs
using copper wiring, rather than aluminum, are expected to have line widths of
0.18 micron or smaller, but will operate up to four times faster, consume less
power and cost approximately 20 to 30 percent less to manufacture. While both
companies will continue to market and sell their technologies independently,
Novellus and IPEC expect to conduct joint customer demonstrations and
evaluations. In 1997, the Company entered into an agreement with MEMC Electronic
Materials, Inc., to develop a family of wafer shaping tools using IPEC's
plasma-based planarization and metrology technology.
 
INTELLECTUAL PROPERTY RIGHTS
 
     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. The two initial patents relating to the
Company's single wafer planarization system products (the Avanti 372M and Avanti
472) expired in September 1997. In 1993, the technology covered by these patents
was licensed on a royalty-free basis to a competitor. This license was granted
pursuant to a settlement agreement in which the Company also incurred settlement
obligations of $1.4 million, all of which have been paid. 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.
 
     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.
 
     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
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<PAGE>   7
 
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 escrow terminates in October 1998.
 
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, Inc. ("Applied
Materials"), Ebara Corporation ("Ebara"), SpeedFam International, Inc.
("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
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 and 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 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
Corporation ("Lam Research"), a semiconductor production equipment supplier,
acquired OnTrak Systems, Inc. ("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 0.5 micron.
 
BACKLOG
 
     The Company includes in its backlog only those customer orders for systems
for which it has accepted purchase orders and assigned shipment dates within the
following 12 months. Backlog also includes orders for spare parts and service
contracts. Industry practice allows the customer to cancel or reschedule orders
prior to shipment without penalties. Accordingly, the Company's backlog at a
particular date may not necessarily be representative of actual sales for any
succeeding period due to orders received for systems to be shipped in the same
quarter, possible changes in system delivery schedules, cancellation of orders
and potential delays in system shipments. As of June 30, 1998, the Company's
order backlog was approximately $39.0 million, compared to approximately $60.8
million at June 30, 1997.
 
EMPLOYEES
 
     As of June 30, 1998, the Company had approximately 1,100 employees. The
Company also utilizes contract employees to supplement key work centers during
peak loads. No employee of the Company is currently represented by a labor
union.
 
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ITEM 2.  PROPERTIES
 
     The Company leases a 150,000 square foot building in Phoenix, Arizona which
is its primary manufacturing, research and administrative facility. The building
has a state-of-the-art Class 10/Class 100 clean room used mainly for process
development. The Company also leases an additional 14,000 square feet in Phoenix
that it uses primarily for storage. The Company leases additional facilities in
various parts of the country. These include a 46,000 square foot facility in
Tempe, Arizona used for subassembly manufacturing, a 28,000 square foot
facility, including a 1,000 square foot Class 1,000 clean room in Tempe, Arizona
used for engineering and research and development, and a 37,500 square foot
facility in Bethel, Connecticut used for manufacturing and research and
development. The Company also leases facilities in San Jose, California;
Portland and Hillsboro, Oregon; Austin, Texas; Burlington, Vermont; Dublin,
Ireland; Tokyo, Japan; and Seoul, Korea.
 
ITEM 3.  LEGAL PROCEEDINGS
 
     Not applicable.
 
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
     Not applicable.
 
                                    PART II
 
ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
     The Company's Common Stock is traded on the Nasdaq National Market System
under the symbol IPEC. The following table sets forth, for the periods
indicated, the high and low sale prices for the Company's Common Stock as
reported by the Nasdaq National Market.
 
<TABLE>
<CAPTION>
                                                              HIGH      LOW
                                                              ----      ---
<S>                                                           <C>       <C>
FISCAL YEAR ENDED JUNE 30, 1997
  1st Quarter...............................................  $20 3/4   $ 9 1/2
  2nd Quarter...............................................   20 3/4    10 1/8
  3rd Quarter...............................................   28        16 3/8
  4th Quarter...............................................   26        12 1/2
FISCAL YEAR ENDED JUNE 30, 1998
  1st Quarter...............................................  $37 1/2   $23 1/8
  2nd Quarter...............................................   37 11/16  13 3/8
  3rd Quarter...............................................   20 5/8    13 1/2
  4th Quarter...............................................   22 5/8    10
</TABLE>
 
     On September 23, 1998, the last reported sale price for the Common Stock as
reported on the Nasdaq National Market was $ 7 5/16 per share. As of June 30,
1998, there were approximately 160 holders of record of Common Stock.
 
DIVIDEND POLICY
 
     The Company has not paid any cash dividends on its Common Stock since its
inception and does not anticipate paying cash dividends on its Common Stock in
the foreseeable future. The terms of the Series B Preferred Stock prevent the
Company from paying dividends on the Common Stock unless the Company has paid
all dividends due to the holders of the Series B Preferred Stock. In fiscal
1997, the Company recorded dividends on its Series B Preferred Stock in the
amount of $284,000 and paid dividends on its Series B Preferred Stock in the
amount of $558,000. In fiscal 1998, the Company recorded dividends on its Series
B Preferred Stock in the amount of $244,000 and paid dividends on its Series B
Preferred Stock in the amount of $246,000.
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ITEM 6.  SELECTED FINANCIAL DATA
 
   
     The following selected historical financial data as of and for the years
ended June 30, 1998, 1997 and 1996 have been derived from the Consolidated
Financial Statements of the Company, which have been audited by KPMG LLP whose
report appears elsewhere herein. The information presented below should be read
in conjunction with the Company's Consolidated Financial Statements, Notes to
the Consolidated Financial Statements and discussions of the historical
financial data included elsewhere in this Form 10-K/A-1. The selected historical
financial data as of and for the years ended June 30, 1995 and 1994 have been
derived from the Consolidated Financial Statements of the Company, which have
been audited by Richard A. Eisner & Company LLP., whose report is not included
herein. Financial data for fiscal 1995 and 1996 have been restated to reflect
the discontinuation of IPEC Clean, Inc. ("IPEC Clean") during the second quarter
of fiscal 1997. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations ("MD&A")."
    
 
<TABLE>
<CAPTION>
                                                     FISCAL YEAR ENDED JUNE 30,
                                       -------------------------------------------------------
                                       1994(1)      1995      1996(2)       1997        1998
                                       -------    --------    --------    --------    --------
                                                (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                    <C>        <C>         <C>         <C>         <C>
CONSOLIDATED STATEMENTS OF OPERATIONS
  DATA(3):
Revenue..............................  $31,158    $ 75,220    $148,690    $144,688    $189,012
Cost of goods sold...................   22,738      41,599      85,061      82,842     121,581
                                       -------    --------    --------    --------    --------
  Gross margin.......................    8,420      33,621      63,629      61,846      67,431
Operating expenses:
  Research and development...........    2,453       5,407      15,877      23,951      33,501
  Purchased research and
     development.....................    1,107          --      36,961          --          --
  Selling, general and
     administrative..................    9,403      17,061      26,653      27,563      37,036
  Program discontinuance charge......       --          --          --      17,601          --
                                       -------    --------    --------    --------    --------
          Total operating expenses...   12,963      22,468      79,491      69,115      70,537
                                       -------    --------    --------    --------    --------
          Operating income (loss)....   (4,543)     11,153     (15,862)     (7,269)     (3,106)
Other income (expense):
  Interest income....................       22         380       1,680         570       4,402
  Interest expense...................   (5,197)       (879)     (2,031)     (1,707)     (6,761)
  Other income (expense), net........      (12)         16         451         273         (88)
                                       -------    --------    --------    --------    --------
     Income (loss) from continuing
       operations before income
       taxes.........................   (9,730)     10,670     (15,762)     (8,133)     (5,553)
     Income tax expense (benefit)....     (830)        714      (6,399)     (2,951)     26,128
                                       -------    --------    --------    --------    --------
     Income (loss) from continuing
       operations....................   (8,900)      9,956      (9,363)     (5,182)    (31,681)
Loss from discontinued operations....       --      (9,357)     (1,294)    (28,564)    (10,578)
                                       -------    --------    --------    --------    --------
  Net income (loss)..................   (8,900)        599     (10,657)    (33,746)    (42,259)
Cumulative dividend on Preferred
  Stock..............................     (118)       (377)       (579)       (284)       (244)
                                       -------    --------    --------    --------    --------
  Net income (loss) attributable to
     Common Stockholders.............  $(9,018)   $    222    $(11,236)   $(34,030)   $(42,503)
                                       =======    ========    ========    ========    ========
Basic and diluted income (loss) per
  share of Common Stock
  From continuing operations.........  $ (3.26)   $   0.97    $  (0.69)   $  (0.35)   $  (1.81)
  From discontinued operations.......  $    --    $  (0.95)   $  (0.09)   $  (1.83)   $  (0.60)
                                       -------    --------    --------    --------    --------
Basic and diluted income (loss) per
  share of Common Stock..............  $ (3.26)   $   0.02    $  (0.78)   $  (2.18)   $  (2.41)
                                       =======    ========    ========    ========    ========
Weighted average shares of Common
  Stock outstanding(4)...............    2,763       9,865      14,434      15,623      17,603
                                       =======    ========    ========    ========    ========
</TABLE>
 
                                        8
<PAGE>   10
 
<TABLE>
<CAPTION>
                                                     FISCAL YEAR ENDED JUNE 30,
                                       -------------------------------------------------------
                                       1994(1)      1995      1996(2)       1997        1998
                                       -------    --------    --------    --------    --------
                                                (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                    <C>        <C>         <C>         <C>         <C>
CONSOLIDATED BALANCE SHEET DATA(3):
Cash and cash equivalents and
  short-term investments.............  $   979    $ 65,790    $ 11,325    $ 40,656    $ 84,130
Working capital......................   15,707      98,555      53,700      99,096     164,176
Total assets.........................   41,466     150,624     184,701     198,065     245,888
Current portion of long-term debt....      979       4,362       1,886      10,599       1,555
Long-term debt, less current
  portion............................    9,249       1,285      22,753      19,546     117,078
Total stockholders' equity...........   19,575     130,120     128,337     131,784      95,284
</TABLE>
 
---------------
(1) Includes results of operations of IPEC Planar Phoenix after its acquisition
    by the Company in September 1993.
 
(2) Includes results of operations of IPEC Planar Portland and IPEC Precision
    after their acquisition by the Company in October 1995 and December 1995,
    respectively.
 
(3) Financial data for fiscal 1995 and 1996 have been restated to reflect the
    discontinuation of IPEC Clean during the second quarter of fiscal 1997.
 
(4) Computed on the basis described in Note 2 of Notes to Consolidated Financial
    Statements.
 
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
 
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. Financial information for fiscal 1995 and 1996 has been restated to
reflect the discontinuation in fiscal 1997 of IPEC Clean.
 
     The Company's revenue is derived from the sale of products and related
spare parts and service. The Company recognizes product and spare part 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 $42.3 million, $33.7 million, $10.7 million in
fiscal 1998, 1997 and 1996, respectively. 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 charge (net of taxes)
for estimated losses on disposal of IPEC Clean, a $3.6 million loss (net of
taxes) from IPEC Clean operations in fiscal 1997, and a $17.6 million pretax
charge for asset write downs due to the discontinuation of the Avanti 672
program. 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.
    
 
                                        9
<PAGE>   11
 
     The Company expects to incur losses until semiconductor industry conditions
improve, especially in Asia, and order levels increase. Gross margins in fiscal
1999 are not expected to improve significantly 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, selected items
of the Company's consolidated statements of operations expressed as a percentage
of revenue:
 
<TABLE>
<CAPTION>
                                                               PERCENT OF TOTAL REVENUE
                                                              FISCAL YEAR ENDED JUNE 30,
                                                              --------------------------
                                                               1996      1997      1998
                                                              ------    ------    ------
<S>                                                           <C>       <C>       <C>
Revenue.....................................................   100.0%    100.0%    100.0%
Cost of goods sold..........................................    57.2      57.3      64.3
                                                              ------    ------    ------
  Gross margin..............................................    42.8      42.7      35.7
Operating expenses:
  Research and development..................................    10.7      16.5      17.7
  Purchased research and development........................    24.9        --        --
  Selling, general and administrative.......................    17.9      19.0      19.6
  Program discontinuance charge.............................      --      12.2        --
                                                              ------    ------    ------
          Total operating expenses..........................    53.5      47.7      37.3
                                                              ------    ------    ------
  Operating loss............................................   (10.7)     (5.0)     (1.6)
Other income (expense):
  Interest income...........................................     1.1       0.4       2.3
  Interest expense..........................................    (1.3)     (1.2)     (3.6)
  Other income, net.........................................     0.3       0.2      (0.1)
                                                              ------    ------    ------
  Loss from continuing operations before income taxes.......   (10.6)     (5.6)     (3.0)
Income tax expense (benefit)................................    (4.3)     (2.0)     13.8
                                                              ------    ------    ------
  Loss from continuing operations...........................    (6.3)     (3.6)    (16.8)
Loss from discontinued operations...........................    (0.9)    (19.7)     (5.6)
                                                              ------    ------    ------
  Net loss..................................................    (7.2)%   (23.3)%   (22.4)%
                                                              ======    ======    ======
</TABLE>
 
FISCAL 1998 COMPARED TO FISCAL 1997
 
     Revenue.  Revenue was $189.0 million for fiscal 1998 compared to $144.7
million for fiscal 1997. This 31% increase was primarily attributable to an
increase in demand for semiconductor capital equipment. The Company achieved
sequential growth in revenue for five consecutive quarters from $29.4 in million
the first quarter of fiscal 1997, to $57.9 million in the second quarter of
fiscal 1998. Revenue for the second half of fiscal 1998 decreased 27% compared
to the first half of fiscal 1998. This resulted from a reduction in revenue from
Asia, particularly Korea, where customers have been unable to arrange for
satisfactory financing terms, and from downturns in the semiconductor capital
equipment and silicon wafer industries. The Company anticipates lower revenue
levels in the first quarter of fiscal 1999 compared to the fourth quarter of
fiscal 1998 and currently anticipates lower revenue levels for fiscal 1999
compared to fiscal 1998 as a result of these economic conditions. Revenue from
international sales represented 46% and 27% of total revenue in fiscal
 
                                       10
<PAGE>   12
   
1998 and 1997, respectively. Revenue from the Company's largest customer, Intel
Corporation, represented 38% and 51% of total revenue in fiscal 1998 and 1997,
respectively. Revenue from Tokyo Electron, Ltd. represented 12% in fiscal 1998.
Accelerated orders in fiscal 1997 represented 14% of revenue.
    

   
     Cost of goods sold.  Cost of goods sold as a percentage of revenue
increased to 64.3% in fiscal 1998 from 57.3% in fiscal 1997. This increase
included a $7.8 million charge in fiscal 1998 for inventory adjustments and
additional retrofit costs for newly available performance enhancing
modifications to installed CMP tools. Additional costs were incurred in fiscal
1997 as a result of the allocation of certain fixed costs across lower revenue.
Cost of goods sold in fiscal 1997 was also adversely affected by a $1.1 million
charge related to warrants issued to a major customer in connection with the
acceleration of certain shipments into the first three quarters of fiscal 1997.
    
 
     Research and development.  Research and development expense increased 40%
to $33.5 million in fiscal 1998 from $24.0 million in fiscal 1997 and increased
as a percentage of revenue to 17.7% in fiscal 1998 from 16.5% in fiscal 1997.
The Company is continuing to develop the AvantGaard 676 and the AvantGaard 776.
Current development efforts also include a 300 mm integrated CMP system (the
AvantGaard 876), plasma-assisted chemical etch systems, metrology technologies,
and copper and dual damascene CMP processes.
 
     Selling general and administrative.  Selling, general and administrative
expense increased 34% to $37.0 million in fiscal 1998 from $27.6 million in
fiscal 1997 and increased as a percentage of revenue to 19.8% in fiscal 1998
from 19.0% in fiscal 1997. The $9.5 million increase resulted primarily from a
higher level of sales activity and an increased international presence in fiscal
1998 compared to fiscal 1997. The Company implemented cost containment measures
in the fourth quarter of fiscal 1998. These cost cutting measures included an
approximately 22% reduction in total work force and consolidation of IPEC Planar
manufacturing operations. Additionally, in fiscal 1997, selling, general and
administrative expenses were offset by a $900 thousand benefit resulting from
adjustments for both the acquisitions of IPEC Planar Phoenix and IPEC Planar
Portland.

   
     Programs discontinuance charge. In the second quarter of fiscal 1997, IPEC
demonstrated that the AvantGaard 676 tool could be used for oxide planarization
as well as metal planarization. As a result of this improvement and prior to
manufacturing any Avanti 672 systems, IPEC decided to discontinue the production
plans for the Avanti 672, an integrated 300-mm high-throughput oxide CMP tool,
and record a $17.6 program discontinuance charge in the quarter ended December
31, 1996. IPEC incurred a writedown of $9.0 million to adjust specific Avanti
672 parts and components to salvage value, since parts and components for this
tool were unlike parts and components for the Company's other products. A
liability amounting to $4.5 million for noncancelable purchase orders was also
incurred as a result of properly reflecting inventory on order at salvage value.
A $4.1 million charge was also incurred to adjust Avanti 672 development and
prototype tools to salvage value.
    
 
     Interest income and interest expense.  Interest income increased to $4.4
million in fiscal 1998 from $600 thousand in fiscal 1997. Interest expense
increased to $6.8 million in fiscal 1998 from $1.7 million in fiscal 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.

   
     Income tax expense.  Income tax expense was $26.1 million for fiscal 1998
compared to an income tax benefit of $3.0 million in fiscal 1997. The effective
tax expense (benefit) rates for fiscal 1998 and 1997 were approximately 471% and
(36)%, respectively. IPEC's deferred tax valuation allowance was $7.9 million at
June 30, 1997. At that time, IPEC had four consecutive quarters of revenue
growth. Taxable income was projected for fiscal 1998, CMP bookings and backlog
were strong, and fiscal 1997 and fiscal 1996 were the only two years that IPEC
had incurred significant tax losses. The increase in tax expense in 1998 results
primarily from a $25.9 million net charge which increased the Company's deferred
tax valuation allowance. Significant negative results of the fourth quarter of
fiscal 1998, including a decline in sales and backlog, were due to the dramatic
downturn in the semiconductor industry and the Asian economic crisis. Major
customers were unable to predict when orders would increase. The industry
instability changed the assumptions used to predict future projected results of
the Company. These new circumstances, combined with three consecutive years of
operating losses as of June 30, 1998, caused a change in judgment about the
realization of the deferred tax assets. As a result, the Company is unable to
predict the level of future sales and ability to generate income under these
circumstances and is predicting tax losses for the next two years. This increase
in the deferred tax valuation allowance fully offsets the Company's net deferred
tax assets.
    
 
     Net loss from discontinued operations.  As a result of the Company's
decision to focus on CMP and CMP-related products, the Company decided to
discontinue the operations of IPEC Clean. The operating results of IPEC Clean
were segregated from the continuing operations of the Company and reported
separately as discontinued operations. The loss recorded in fiscal 1997 was due
to a $3.6 million operating loss, net of taxes, and a $25.0 million charge, net
of taxes, for the estimated loss on disposal of IPEC Clean. The Company recorded
an additional write-down of the net assets of IPEC Clean of $10.6 million in
fiscal 1998. The Company has closed IPEC Clean's facilities and is currently in
the process of liquidating its assets.
 
                                       11
<PAGE>   13
 
FISCAL 1997 COMPARED TO FISCAL 1996

   
     Revenue.  Revenue was $144.7 million for fiscal 1997 compared to $148.7
million for fiscal 1996. This 3% decrease was primarily attributable to a
decline in demand for semiconductor capital equipment in fiscal 1997 and the
Company's lack of a high-throughput oxide process CMP system. On a quarterly
basis, revenue increased sequentially every quarter in fiscal 1996 from $30.2
million in the first quarter of fiscal 1996 to $41.9 million in the fourth
quarter of fiscal 1996. Revenue declined to $29.4 million in the first quarter
of fiscal 1997, followed by sequential quarterly revenue growth in fiscal 1997,
resulting in quarterly revenue of $42.6 million in the fourth quarter of fiscal
1997. Revenue from international sales represented 27% and 28% of total revenue
in fiscal 1997 and 1996, respectively. Revenue from IPEC Precision represented
8% and 3% of total revenue in fiscal 1997 and 1996, respectively. Revenue from
the Company's largest customer, Intel Corporation, represented 51% and 35% of
total revenue in fiscal 1997 and 1996, respectively. Accelerated orders in
fiscal 1997 represented 14% of revenue.
    
 
     Cost of goods sold.  Cost of goods sold increased as a percentage of
revenue to 57.3% for fiscal 1997 from 57.2% in fiscal 1996. Cost of goods sold
during fiscal 1997 was adversely affected by a $1.1 million charge related to
warrants issued to a major customer in connection with an agreement permitting
the Company to accelerate certain deliveries of equipment in fiscal 1997. The
charge was based on the market value of the warrant shares on the date of the
agreement. All warrants under the agreement have been issued, and all charges
relating to the agreement have been incurred. Cost of goods sold also increased
as a percentage of revenue in fiscal 1997 due to increased customer service
expenditures in fiscal 1997. The Company's shift toward direct international
sales and field service favorably affected fiscal 1997 gross margin through a
reduction in distributor discounts compared to fiscal 1996. However, the margin
improvement was partially offset by increased sales commissions recorded as
selling, general and administrative expense.
 
     Research and development.  Research and development expense increased 51%
to $24.0 million in fiscal 1997 from $15.9 million in fiscal 1996, and increased
as a percentage of revenue to 16.5% in fiscal 1997 from 10.7% in fiscal 1996. Of
this increase, $5.8 million was due to development of the Company's
high-throughput CMP tools and the related metal and oxide CMP processes.
Research and development costs at IPEC Precision increased from $1.6 million in
fiscal 1996 to $3.9 million in fiscal 1997. These costs were incurred primarily
to develop IPEC Precision's wafer shaping tools and metrology products.
 
     Selling, general and administrative.  Selling, general and administrative
expenses increased 3% to $27.6 million in fiscal 1997 from $26.7 million in
fiscal 1996, and increased as a percentage of revenue to 19.0% in fiscal 1997
from 17.9% in fiscal 1996.
 
     Interest income.  Interest income decreased to $570,000 in fiscal 1997 from
$1.7 million in fiscal 1996 as a result of lower average cash and cash
equivalent balances in fiscal 1997.
 
     Interest expense.  Interest expense decreased to $1.7 million in fiscal
1997 from $2.0 million in fiscal 1996 primarily as a result of repayment of
borrowings related to the acquisitions of IPEC Planar Portland and IPEC
Precision.
 
     Income tax expense.  The effective tax benefit rates for fiscal 1997 and
1996 were approximately 36% and 41%, respectively. The lower tax benefit rate
for fiscal 1997 resulted primarily from adjustments of deferred tax balances and
state tax accruals.
 
     Net loss from discontinued operations.  The operating results of IPEC Clean
have been segregated from the continuing operations of the Company and reported
separately as discontinued operations for all periods presented. The loss from
IPEC Clean (net of taxes) increased to $28.6 million in fiscal 1997 from $1.3
million in fiscal 1996. The fiscal 1997 loss consisted of a $3.6 million
operating loss incurred in the first half of fiscal 1997 and a $25.0 million
one-time charge for the estimated loss on disposal of IPEC Clean. Results of
operations of IPEC Clean for the third and fourth quarters of fiscal 1997 were
charged to an accrued liability included in this charge.
 
                                       12
<PAGE>   14
 
LIQUIDITY AND CAPITAL RESOURCES
 
     The Company's principal sources of liquidity include cash, cash equivalents
and short-term investments of $84.1 million as of June 30, 1998, an increase of
$43.5 million from June 30, 1997. The increase in cash, cash equivalents and
short-term investments in fiscal 1998 resulted from the private placement of
$115.0 million of 6.25% Convertible Subordinated Notes (the "Notes") due in
2004. 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 from the Notes were utilized to repay the balance of the Company's
revolving line of credit. Remaining portions of proceeds are being used to
expand the Company's sales and service operations and for general corporate
purposes including working capital and research and development. Pending such
uses, the Company has invested net proceeds in interest bearing investment grade
securities.
 
   
     As of June 30, 1998, the Company had $164.2 million of working capital
compared with $99.1 million as of June 30, 1997. The Company's accounts
receivable decreased to $43.8 million as of June 30, 1998 as compared to $45.6
million as of June 30, 1997. The decrease in accounts receivable was primarily
due to lower level of sales activity in the fourth quarter of fiscal 1998
compared to the fourth quarter of fiscal 1997. The Company's inventory increased
to $67.0 million as of June 30, 1998 compared to $44.7 million as of June 30,
1997. This was primarily due to an increase in production of the Company's
AvantGaard 676 and 776 systems, and lower revenues in the quarters ended March
31, and June 30, 1998 resulting from the economic slowdown in the semiconductor
capital equipment industry. There were no significant long-term purchase
commitments at June 30, 1998.
    
 
     The Company's property, plant and equipment additions were $17.0 million in
fiscal 1998 compared to $3.7 million in fiscal 1997. These additions were
primarily due to additions of testing and demonstration equipment related to the
AvantGaard 676, 776 and 876 systems.
 
     Total long-term debt increased to $118.6 million as of June 30, 1998 from
$30.1 million as of June 30, 1997 as a result of the issuance of $115.0 million
of Convertible Subordinated Notes. Total long-term debt as a percentage of
stockholders' equity increased to 125% as of June 30, 1998 from 23% as of June
30, 1997.
 
     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 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.
 
                                       13
<PAGE>   15
 
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, and $42.3 million in fiscal 1998. 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.
 
     Quarterly Operating Results May Fluctuate.  The Company's quarterly
operating results may fluctuate due to a variety of factors, including the
following:
 
     - 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.
 
                                       14
<PAGE>   16
 
     - 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.
 
     - 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 believes these customers will be
       unable to place volume orders for the remainder of calendar 1998.
 
     - The semiconductor capital equipment market has experienced a slowdown in
       the first half of 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
       as a result of a decrease in orders. The Company currently anticipates
       that revenue in the first quarter of fiscal 1999 will be less than
       revenue in the fourth quarter of fiscal 1998 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.
 
     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 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
                                       15
<PAGE>   17
 
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 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 and 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 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 0.5 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 compara-
 
                                       16
<PAGE>   18
 
ble 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 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 676
was initially designed solely to planarize metal layers and has not been broadly
adopted for this purpose in volume production. 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 may need to develop 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
 
                                       17
<PAGE>   19
 
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 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.
 
     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
 
                                       18
<PAGE>   20
 
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.
 
     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 escrow terminates in October 1998.
 
     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
 
                                       19
<PAGE>   21
 
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 would 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;
 
     - 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.
                                       20
<PAGE>   22
 
     Description of Forward-Looking Statements.  This Form 10-K 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 future trends
and growth in the markets for semiconductor devices, semiconductor capital
equipment and CMP equipment; the Company's product research and development
efforts; establishment of an Asia-Pacific division; cooperative research and
project development efforts including the Company's relationship with Novellus
to develop copper and dual damascene CMP; competition; future revenue that may
be implied by reported backlog; revenue in fiscal 1999 and the first quarter of
fiscal 1999; tax rates; sufficiency of the Company's capital resources; gross
margins in fiscal 1999; profitability in fiscal 1999; cost containment measures;
ability of Korean customers to place orders; and year 2000 issues.
 
     These forward-looking statements may be found in "Business", "MD&A" and
"Risk Factors." Forward-looking statements not specifically set forth above may
also be found in these and other sections of this Form 10-K. 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 "Risk Factors" and elsewhere in this Form 10-K.
 
ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
     Not applicable.
 
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
 
     See Index to IPEC Financial Statements on page F-1.
 
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
 
     Not applicable.
 
                                    PART III
 
ITEM 10.  EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT
 
     Information about the Company's directors required by this item will be
contained in the Company's Notice of 1998 Annual Meeting of Stockholders and
Proxy Statement, pursuant to Regulation 14A, to be filed with the Securities and
Exchange Commission within 120 days after June 30, 1998. Such information is
incorporated herein by reference. The following table sets forth certain
information concerning the Company's current executive officers as of June 30,
1998:
 
<TABLE>
<CAPTION>
NAME                                    AGE                   POSITION
----                                    ---                   --------
<S>                                     <C>    <C>
Sanjeev R. Chitre.....................  43     Chairman of the Board of Directors
Roger D. McDaniel.....................  59     President and Chief Executive Officer
John S. Hodgson.......................  47     Vice President, Chief Financial
                                               Officer, Treasurer and Secretary
</TABLE>
 
     SANJEEV R. CHITRE founded the Company and has been the Chairman of the
Board of Directors since its organization in October 1989. He was IPEC's Chief
Executive Officer from October 1989 to August 1997. Mr. Chitre was a Vice
President of marketing and sales of Superwave Technology, Inc., a manufacturer
of automated in-line systems for the semiconductor industry, from 1984 through
1989.
 
     ROGER D. MCDANIEL has been President and Chief Executive Officer of the
Company since September 1997 and has been a director of the Company since August
1996. From April 1989 to August 1996, he was the Chief Executive Officer of
MEMC, a silicon wafer producer, and served as a director of MEMC from April 1989
to March 1997. Mr. McDaniel is a director of Veeco Instruments, Inc. and is a
director and past
 
                                       21
<PAGE>   23
 
Chairman of the Semiconductor Equipment and Materials International, an
international industry association of material and equipment manufacturers which
serves the semiconductor industry.
 
     JOHN S. HODGSON has been Vice President, Chief Financial Officer, Treasurer
and Secretary of the Company since July 1994. From 1985 to 1993, he served in
senior financial capacities for Dover Technologies, the electronics subsidiary
of Dover Corporation ("Dover"). In 1993, Mr. Hodgson was named Vice President of
Finance of Dovatron International, Inc., a contract electronics manufacturer
that was spun out into a separate public company by Dover.
 
ITEM 11.  EXECUTIVE COMPENSATION
 
     In connection with the acquisition of Westech, in August 1993 the Company
entered into a ten year Consulting Agreement with Harold C. Baldauf, a director
of the Company, and his two sons. Under the terms of the agreement, they are to
provide consulting services in the day-to-day operations of the Company's
business for up to 130 days in the aggregate during each calendar year. They are
to be paid $150,000 per year to be divided among them in accordance with their
determination of the proportions of the consulting services provided by each of
them during the relevant period. During the term of the agreement, Mr. Baldauf
and his two sons are prohibited from acting in any capacity in connection with
any entities which operate a business in competition with the business of the
Company or its affiliates. The terms of the agreement were determined through
arms-length negotiation conducted between the Company and the consultants, none
of whom were affiliates of the Company at the time of the negotiations. However,
because the agreement was negotiated in the context of the Westech acquisition,
the terms of the consulting arrangements may be more favorable to Mr. Baldauf
and his sons than an agreement the Company would negotiate with a non-affiliate.
The Company paid $650,000 to Mr. Baldauf to buy-out this agreement in 1998. The
non-compete covenant in the agreement will remain in effect until August 2003.
 
     Additional information required by this item will be contained in the
Company's Notice of 1998 Annual Meeting of Stockholders and Proxy Statement,
pursuant to Regulation 14A, to be filed with the Securities and Exchange
Commission within 120 days after June 30, 1998 and is incorporated herein by
reference.
 
ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
     Information required by this item will be contained in the Company's Notice
of 1998 Annual Meeting of Stockholders and Proxy Statement, pursuant to
Regulation 14A, to be filed with the Securities and Exchange Commission within
120 days after June 30, 1998 and is incorporated herein by reference.
 
ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
     Information required by this item will be contained in the Company's Notice
of 1998 Annual Meeting of Stockholders and Proxy Statement, pursuant to
Regulation 14A, to be filed with the Securities and Exchange Commission within
120 days after June 30, 1998 and is incorporated herein by reference.
 
                                       22
<PAGE>   24
 
ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
 
     (a) Documents filed as part of this report:
 
        1. Index to Consolidated Financial Statements
 
   
<TABLE>
<CAPTION>
                                                                PAGE(S) IN
                                                                FORM 10-K/A-1
                                                                ----------
<S>                                                             <C>
Independent Auditors' Report, KPMG LLP......................       F-2
Consolidated Balance Sheets as of June 30, 1998 and 1997....       F-3
Consolidated Statements of Operations for the years ended
  June 30, 1998, 1997 and 1996..............................       F-4
Consolidated Statements of Changes in Stockholders' Equity
  for the years ended June 30, 1998, 1997 and 1996..........       F-5
Consolidated Statements of Cash Flows for the years ended
  June 30, 1998, 1997 and 1996..............................       F-6
Notes to Consolidated Financial Statements..................       F-7
</TABLE>
    
 
        2. Exhibits
 
     The following exhibits are filed as part of, or incorporated by reference
into, this amendment:
 
<TABLE>
<CAPTION>
EXHIBIT                           DESCRIPTION
-------                           -----------
<C>       <S>
     2.1  Stock Purchase Agreement among IPEC, William Reiersgaard and
          GAARD Automation Inc. ("GAARD"), dated effective October 30,
          1995. Incorporated by reference to Exhibit 2.1 to the
          Company's Current Report on Form 8-K for reporting date
          October 30, 1995 and filed November 14, 1995 (File No.
          0-20470) ("GAARD 8-K").
     2.2  Asset Purchase Agreement between IPEC and Hughes Danbury
          Optical Systems, Inc. ("HDOS"), dated effective December 29,
          1995. Incorporated by reference to Exhibit 2.1 to the
          Company's Current Report on Form 8-K for reporting date
          December 29, 1995 and filed January 13, 1996 (File No.
          0-20470) ("HDOS 8-K").
     3.1  Certificate of Incorporation, as amended. Incorporated by
          reference to Exhibit 3.1 to the Company's Annual Report on
          Form 10-KSB for the fiscal year ended June 30, 1993
          (File No. 0-20470) (the "1993 Form 10-KSB").
     3.2  Amendment of Certificate of Incorporation, effective
          December 16, 1993. Incorporated by reference to Exhibit 3.2
          to Amendment No. 1, filed on December 30, 1993 ("SB-2
          Amendment No. 1") to the Company's Registration Statement on
          Form SB-2 (Registration No. 33-70962) (the "SB-2
          Registration Statement").
     3.3  By-Laws, as amended. Incorporated by reference to Exhibit
          3.3 to SB-2 Amendment No. 1.
     3.4  Certificate of Amendment of the Certificate of Incorporation
          of the Company, filed with the State of Delaware on January
          31, 1996, previously filed as Exhibit 3(i).1 to the
          Company's Quarterly Report on Form 10-Q for the third
          quarter ended March 31, 1996, incorporated herein by
          reference.
     4.1  Stockholders' Agreement, dated as of August 31, 1993 among
          the Company, Harold C. Baldauf ("HCB") and Janet A. Baldauf
          ("JAB"). Incorporated by reference to Exhibit 10.22 to the
          1993 Form 10-KSB.
    10.1  Licensing and Manufacturing Agreement, dated July 18, 1990,
          between the Company and MTC. Incorporated by reference to
          Exhibit 10.4 to the IPO Registration Statement.
    10.2  Form of 1994 Public Offering Unit Purchase Option between
          the Company and Blair. Incorporated by reference to Exhibit
          1.2 to Amendment No. 3 to the SB-2 Registration Statement,
          filed January 25, 1994 ("SB-2 Amendment No. 3").
    10.3  Consulting Agreement dated as of August 31, 1993 by and
          among the Company, HCB, Harold Baldauf, Jr. and David
          Baldauf. Incorporated by reference to Exhibit 10.24 to the
          1993 Form 10-KSB.
</TABLE>
 
                                       23
<PAGE>   25
 
<TABLE>
<CAPTION>
EXHIBIT                           DESCRIPTION
-------                           -----------
<C>       <S>
    10.4  Settlement Agreement, dated January 23, 1993, between
          Westech and SpeedFam. Incorporated by reference to Exhibit
          10.34 to the 1993 Form 10-KSB.
    10.5  Indenture of Lease, dated July 30, 1993, relating to
          facilities leased for Westech's subassembly manufacturing
          facility. Incorporated by reference to Exhibit 10.38 to SB-2
          Amendment No. 2.
    10.6  Lease, dated July 20, 1994, relating to Westech's facility
          in Phoenix, Arizona. Incorporated by reference to Exhibit
          10.35 to the Company's Registration Statement on Form S-3
          (Registration No. 33-9038) filed on May 12, 1995 (the "May
          1995 Form S-3").
    10.7  Lease, dated November 1, 1994, relating to Tempe, Arizona
          research and development facility. Incorporated by reference
          to Exhibit 10.36 to the May 1995 Form S-3.
    10.8  Lease, dated October 15, 1985, as amended (together with
          related Subordination, Non-Disturbance and Estoppel
          Agreement dated July 1, 1986), relating to the facility of
          Athens Research and Development Corporation ("Athens") in
          Oceanside, California. Incorporated by reference to Exhibit
          10.37 to the May 1995 Form S-3.
    10.9  Lease, dated March 23, 1988, as amended (together with
          related Subordination, Nondisturbance and Attornment
          Agreement dated January 17, 1995), relating to Athens'
          larger facility in Oceanside, California. Incorporated by
          reference to Exhibit 10.38 to the May 1995 Form S-3.
   10.10  IPEC 1992 Stock Option Plan (as amended December 12, 1995),
          previously filed as Exhibit 10.1 to the Company's Quarterly
          Report on Form 10-Q for the second quarter ended December
          31, 1995, incorporated herein by reference.
   10.11  Promissory Note (First Note) from IPEC to William
          Reiersgaard dated October 30, 1995. Incorporated by
          reference to Exhibit 2.4 to the GAARD 8-K.
   10.12  Promissory Note (Second Note) from IPEC to William
          Reiersgaard dated October 30, 1995. Incorporated by
          reference to Exhibit 2.4 to the GAARD 8-K.
   10.13  Security and Pledge Agreement dated December 29, 1995
          between IPEC Precision and IPEC in favor of HDOS.
          Incorporated by reference to Exhibit 2.5 to the HDOS 8-K.
   10.14  Form of Promissory Note and Security Agreement dated
          December 1995 from Sanjeev Chitre to IPEC, previously filed
          as Exhibit 10.6 to the Company's Quarterly Report on Form
          10-Q for the second quarter ended December 31, 1995,
          incorporated herein by reference.
   10.15  Lease Agreement, dated March 8, 1996, relating to IPEC
          Precision's facility in Bethel, Connecticut. Incorporated by
          reference to Exhibit 10.9 to the Company's Annual Report on
          Form 10-K for the year ended June 30, 1996 (File No.
          0-20470) ("1996 Form 10-K").
   10.16  Loan Agreement dated April 24, 1996, between the Company and
          First Interstate Bank of Arizona, N.A. ("Credit Facility
          Agreement"), with related Side Letter Concerning Liens dated
          April 24, 1996, Letter Agreement dated May 31, 1996,
          Revolving Credit Note dated April 24, 1996, Term Note dated
          April 24, 1996 and Security Agreement dated April 24, 1996.
          Incorporated by reference to Exhibit 10.20 to the 1996 Form
          10-K.
          The following additional schedules to the Credit Facility
          Agreement have been omitted and the Company agrees to
          furnish supplementally a copy of any omitted schedule to the
          Securities and Exchange Commission upon request: Officer's
          Certificate of Parent dated April 24, 1996, Borrowing Base
          Certificate dated April 25, 1996, Compliance Certificate
          dated April 24, 1996, Notice of Negative Pledge dated April
          24, 1996, and Patent Mortgage, Trademark Security
          Agreements, Patent Security Agreements and Copyright
          Security Agreements for the Company and its subsidiaries,
          each dated April 24, 1996.
   10.17  Warrant Purchase Agreement, dated as of October 4, 1996,
          between the Company and Intel Corporation. Incorporated by
          reference to Exhibit 10.1 to the Company's Quarterly Report
          on Form 10-Q filed on November 14, 1996 for the quarter
          ended September 30, 1996.
</TABLE>
 
                                       24
<PAGE>   26
    
<TABLE>
<CAPTION>
EXHIBIT                           DESCRIPTION
-------                           -----------
<C>       <S>
   10.18  Notice of Settlement of Indemnification Claims under Westech
          Agreement and Plan of Merger and Related Escrow Agreement,
          dated September 19, 1996. Incorporated by reference to
          Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q
          filed on November 14, 1996 for the quarter ended September
          30, 1996.
   10.19  Subscription Agreement, dated as of December 12, 1996,
          between the Company and Fletcher International Limited
          ("Fletcher"). Incorporated by reference to Exhibit 99.1 to
          the Company's Current Report on Form 8-K for reporting date
          December 16, 1996 and filed on December 30, 1996 (File No.
          0-20470) ("Fletcher 8-K").
   10.20  Warrant Certificate, dated as of December 16, 1996, issued
          by the Company to Fletcher. Incorporated by reference to
          Exhibit 99.1 to the Fletcher 8-K.
   10.21  Lease Agreement between Seldin Properties and the Company,
          dated December 26, 1996. Incorporated by reference to
          Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
          filed on February 14, 1997 for the quarter ended December
          31, 1996.
   10.22  Amendment to Loan Agreement between Wells Fargo Bank and the
          Company, dated March 28, 1997. Incorporated by reference to
          Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
          filed on May 14, 1997 for the quarter ended March 31, 1997.
   10.23  Fifth Modification of Loan Agreement between Wells Fargo
          Bank and the Company, dated April 30, 1997. Incorporated by
          reference to Exhibit 10.27 to the Company's Annual Report on
          form 10-K filed for the year ended June 30, 1997 ("1997 Form
          10-K").
   10.24  Sixth Modification of Loan Agreement between Wells Fargo
          Bank and the Company dated June 27, 1997. Incorporated by
          reference to Exhibit 10.28 to the 1997 Form 10-K.
   10.25  Seventh Modification of Loan Agreement Wells Fargo Bank and
          the Company dated September 11, 1997. Incorporated by
          reference to Exhibit 10.30 to the Company's Registration
          Statement on Form S-3 (Registration No. 333-42369).
   10.26  Purchase Agreement between Integrated Process Equipment
          Corp. (the "Company") and Morgan Stanley & Co. Incorporated
          ("MS"), acting on behalf of MS, Hambrecht & Quist LLC,
          Prudential Securities Incorporated and UBS Securities LLC
          (collectively, the "Initial Purchasers"), dated September
          11, 1997. Incorporated by reference to Exhibit 10.1 to the
          Company's Quarterly Report on Form 10-Q filed on November
          13, 1997 for the quarter ended September 30, 1997
          ("September 30, 1997 Form 10-Q").
   10.27  Indenture between the Company and State Street Bank and
          Trust of California, N.A., dated September 15, 1997.
          Incorporated by reference to Exhibit 10.2 to the September
          30, 1997 Form 10-Q.
   10.28  Registration Rights Agreement between the Company and the
          Initial Purchasers, dated September 15, 1997. Incorporated
          by reference to Exhibit 10.3 to the September 30, 1997 Form
          10-Q.
   10.29  Specimen of 6 1/4% Convertible Subordinated Note due 2004
          issued by the Company on September 17, 1997 in the amount of
          $115,000,000. Incorporated by reference to Exhibit 10.4 to
          the September 30, 1997 Form 10-Q.
   10.30  Executive Employment Agreement between the Company and Roger
          D. McDaniel (without exhibits), dated August 13, 1997.
          Incorporated by reference to Exhibit 10.5 to the September
          30, 1997 Form 10-Q.
   10.31  Amendment to Executive Employment Agreement between the
          Company and Roger D. McDaniel, dated December 4, 1997.
          Incorporated by reference to Exhibit 4.2 to the Company's
          Registration Statement on Form S-8 (Registration No.
          333-59189).
   *11.1  Statement Regarding Computation of Per Share Earnings.
   *21.1  Subsidiaries of Company.
</TABLE>
    
 
                                       25
<PAGE>   27
 
   
<TABLE>
<CAPTION>
EXHIBIT                           DESCRIPTION
-------                           -----------
<C>       <S>
    23.1  Consent of KPMG LLP.
   *24.1  Power of Attorney.
    27.1  Financial Data Schedule
</TABLE>
    
 
     (b) Reports on Form 8-K:
 
         No reports on Form 8-K were filed during the quarter ended June 30,
         1998.
 
   

      *  Incorporated by reference to the corresponding Exhibits to the
         Company's Annual Report on Form 10-K filed on September 25, 1998.
    

                                       26
<PAGE>   28
 
                                   SIGNATURES

   
     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this amendment to be signed
on its behalf by the undersigned, thereunto duly authorized:
    
 
                                          INTEGRATED PROCESS EQUIPMENT CORP.
                                          a Delaware Corporation
 
                                          By: /s/ JOHN S. HODGSON
 
                                            ------------------------------------
                                            John S. Hodgson
                                            Vice President, Chief Financial
                                              Officer, Treasurer and Secretary
                                              (Principal Financial and
                                              Accounting Officer)
 
   
Date: March 4, 1999
    
   
    

   
     Pursuant to the requirements of the Securities Exchange Act of 1934, this
amendment 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
            ---------                                   -----                              ----
<C>                                   <S>                                           <C>
 
      /s/ ROGER D. MCDANIEL*
----------------------------------
        Roger D. McDaniel             President, Chief Executive Officer and          March 4, 1999
                                      Director (Principal Executive Officer)
 
      /s/ SANJEEV R. CHITRE*
----------------------------------
        Sanjeev R. Chitre             Chairman of the Board of Directors              March 4, 1999
 
       /s/ JOHN S. HODGSON
----------------------------------
         John S. Hodgson              Vice President, Chief Financial Officer,        March 4, 1999
                                      Treasurer and Secretary (Principal
                                      Financial and Accounting Officer)
 
      /s/ HAROLD C. BALDAUF*
----------------------------------
        Harold C. Baldauf             Director                                        March 4, 1999
 
      /s/ WILLIAM J. FRESCHI*
----------------------------------
        William J. Freschi            Director                                        March 4, 1999
 
         /s/ KENNETH LEVY*
----------------------------------
           Kenneth Levy               Director                                        March 4, 1999
</TABLE>
    

   
* By: /s/ John S. Hodgson
      ----------------------------
      John S. Hodgson
      Attorney-in-Fact
    

                                       27
<PAGE>   29
 
              INTEGRATED PROCESS EQUIPMENT CORP. AND SUBSIDIARIES
 
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
   
<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Independent Auditors' Report, KPMG LLP......................  F-2
Consolidated Balance Sheets as of June 30, 1998 and 1997....  F-3
Consolidated Statements of Operations for the years ended
  June 30, 1998, 1997 and 1996..............................  F-4
Consolidated Statements of Changes in Stockholders' Equity
  for the years ended June 30, 1998, 1997 and 1996..........  F-5
Consolidated Statements of Cash Flows for the years ended
  June 30, 1998, 1997 and 1996..............................  F-6
Notes to Consolidated Financial Statements..................  F-7
</TABLE>
    
 
                                       F-1
<PAGE>   30
 
                          INDEPENDENT AUDITORS' REPORT
 
The Board of Directors and Stockholders
Integrated Process Equipment Corp.:
 
     We have audited the accompanying consolidated balance sheets of Integrated
Process Equipment Corp. and subsidiaries as of June 30, 1998 and 1997 and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for each of the years in the three-year period ended June 30,
1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
 
     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Integrated
Process Equipment Corp. and subsidiaries as of June 30, 1998 and 1997 and the
results of their operations and their cash flows for each of the years in the
three-year period ended June 30, 1998 in conformity with generally accepted
accounting principles.
 
   
                                          KPMG LLP
    
 
Phoenix, Arizona
August 4, 1998
 
                                       F-2
<PAGE>   31
 
              INTEGRATED PROCESS EQUIPMENT CORP. AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                                    JUNE 30,
                                                              ---------------------
                                                                1998         1997
                                                              ---------    --------
<S>                                                           <C>          <C>
                                      ASSETS
Current assets:
  Cash and cash equivalents.................................  $  14,098    $ 40,656
  Short-term investments....................................     70,032          --
  Accounts receivable.......................................     43,837      45,590
  Inventories...............................................     67,049      44,729
  Prepaid expenses..........................................      2,686         968
  Net assets of discontinued operations.....................         --       2,463
  Deferred income taxes.....................................         --      11,425
                                                              ---------    --------
          Total current assets..............................    197,702     145,831
                                                              ---------    --------
Property, plant and equipment, net..........................     34,883      25,462
Intangible assets, net......................................      8,820      11,798
Deferred income taxes.......................................         --      13,381
Other assets................................................      4,483       1,593
                                                              ---------    --------
                                                              $ 245,888    $198,065
                                                              =========    ========
                       LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Notes payable.............................................  $      --    $    124
  Current portion of long-term debt.........................      1,555      10,599
  Accounts payable..........................................     10,443      17,445
  Accrued liabilities.......................................     21,528      18,567
                                                              ---------    --------
          Total current liabilities.........................     33,526      46,735
Long-term debt, less current portion........................    117,078      19,546
                                                              ---------    --------
          Total liabilities.................................    150,604      66,281
                                                              ---------    --------
Commitments and contingencies
Stockholders' equity:
  Series B 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 14,543 shares at June 30, 1997.
      Liquidation preference of $1,342 as of June 30,
      1998..................................................         --          --
     Series B-2 cumulative preferred stock. Authorized
      21,478 shares, issued and outstanding 19,544 shares at
      June 30, 1998 and 1997. Liquidation preference of
      $1,820 as of June 30, 1998............................         --          --
     Series B-3 cumulative preferred stock. Authorized
      21,478 shares, issued and outstanding 9,898 shares at
      June 30, 1998 and 1997. Liquidation preference of $922
      as of June 30, 1998...................................         --          --
  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. One vote per
     share. Authorized 50,000,000 shares, issued and
     outstanding 17,530,368 shares at June 30, 1998 and
     16,889,071 shares at June 30, 1997.....................        175         169
  Class A common stock, $.01 par value per share. Four votes
     per share Authorized 3,500,000 shares, issued and
     outstanding 223,675 shares at June 30, 1998 and 453,057
     shares at June 30, 1997................................          2           5
  Additional paid-in capital................................    196,242     189,422
  Accumulated deficit.......................................   (100,355)    (57,850)
  Foreign currency translation adjustment...................       (780)         38
                                                              ---------    --------
          Total stockholders' equity........................     95,284     131,784
                                                              ---------    --------
                                                              $ 245,888    $198,065
                                                              =========    ========
</TABLE>
 
          See accompanying notes to consolidated financial statements.
                                       F-3
<PAGE>   32
 
              INTEGRATED PROCESS EQUIPMENT CORP. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                                   YEARS ENDED JUNE 30,
                                                             --------------------------------
                                                               1998        1997        1996
                                                             --------    --------    --------
<S>                                                          <C>         <C>         <C>
Revenue....................................................  $189,012    $144,688    $148,690
Cost of goods sold.........................................   121,581      82,842      85,061
                                                             --------    --------    --------
  Gross margin.............................................    67,431      61,846      63,629
Operating expenses:
  Research and development.................................    33,501      23,951      15,877
  Selling, general and administrative......................    37,036      27,563      26,653
  Purchased research and development.......................        --          --      36,961
  Program discontinuance charge............................        --      17,601          --
                                                             --------    --------    --------
          Total operating expenses.........................    70,537      69,115      79,491
                                                             --------    --------    --------
  Operating loss...........................................    (3,106)     (7,269)    (15,862)
 
Other income (expense):
  Interest income..........................................     4,402         570       1,680
  Interest expense.........................................    (6,761)     (1,707)     (2,031)
  Other, net...............................................       (88)        273         451
                                                             --------    --------    --------
          Total other income (expense).....................    (2,447)       (864)        100
                                                             --------    --------    --------
  Loss from continuing operations before income taxes......    (5,553)     (8,133)    (15,762)
Income tax expense (benefit)...............................    26,128      (2,951)     (6,399)
                                                             --------    --------    --------
  Loss from continuing operations..........................   (31,681)     (5,182)     (9,363)
 
Discontinued operations:
  Loss from operations of IPEC Clean, net of taxes.........        --      (3,614)     (1,294)
  Loss on disposal of IPEC Clean, net of taxes.............   (10,578)    (24,950)         --
                                                             --------    --------    --------
  Loss from discontinued operations........................   (10,578)    (28,564)     (1,294)
                                                             --------    --------    --------
  Net loss.................................................   (42,259)    (33,746)    (10,657)
Cumulative dividend on preferred stock.....................      (244)       (284)       (579)
                                                             --------    --------    --------
  Net loss attributable to common stockholders.............  $(42,503)   $(34,030)   $(11,236)
                                                             ========    ========    ========
Basic and diluted loss from continuing operations per
  common share.............................................  $  (1.81)   $  (0.35)   $  (0.69)
                                                             ========    ========    ========
Basic and diluted net loss per common share................  $  (2.41)   $  (2.18)   $  (0.78)
                                                             ========    ========    ========
Weighted average shares used in per share calculation......    17,603      15,623      14,434
                                                             ========    ========    ========
</TABLE>
 
          See accompanying notes to consolidated financial statements.
                                       F-4
<PAGE>   33
 
              INTEGRATED PROCESS EQUIPMENT CORP. AND SUBSIDIARIES
 
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                YEARS ENDED JUNE 30, 1998, 1997 AND 1996
                                -------------------------------------------------------------------------
                                                                                FOREIGN
                                         CLASS A   ADDITIONAL                  CURRENCY         TOTAL
                                COMMON   COMMON     PAID-IN     ACCUMULATED   TRANSLATION   STOCKHOLDERS'
                                STOCK     STOCK     CAPITAL       DEFICIT     ADJUSTMENT       EQUITY
                                ------   -------   ----------   -----------   -----------   -------------
<S>                             <C>      <C>       <C>          <C>           <C>           <C>
Balance at June 30, 1995......   $135      $ 5      $142,422     $ (12,450)      $   8        $130,120
Issuance of Series B-3
  preferred stock.............     --       --         2,000            --          --           2,000
Exercise of warrants and unit
  purchase options............      3       --         2,339            --          --           2,342
Acquisition of remaining
  interests in Athens Corp....      2       --           204            --          --             206
Conversion of convertible
  debenture...................     --       --           110            --          --             110
Exercise of stock options, net
  of tax benefits and employee
  stock plan purchases........      2       --         4,555            --          --           4,557
Issuance of warrants..........     --       --           100            --          --             100
Net loss......................     --       --            --       (10,657)         --         (10,657)
Preferred stock dividends
  paid........................     --       --            --          (439)         --            (439)
Foreign currency translation
  adjustment..................     --       --            --            --          (2)             (2)
                                 ----      ---      --------     ---------       -----        --------
Balance at June 30, 1996......    142        5       151,730       (23,546)          6         128,337
Retirement of Series B-1
  preferred stock.............     --       --          (500)           --          --            (500)
Conversion of Series B
  preferred stock to common
  stock.......................      2       --            (2)           --          --              --
Issuance of Series C preferred
  stock (less offering costs
  of $1,600) and conversion of
  Series C preferred stock to
  common stock................     13       --        23,387            --          --          23,400
Issuance of warrants..........     --       --         1,059            --          --           1,059
Exercise of stock options, net
  of tax benefits and employee
  stock plan purchases........     10       --        13,403            --          --          13,413
Exercise of warrants..........      2       --           345            --          --             347
Net loss......................     --       --            --       (33,746)         --         (33,746)
Preferred stock dividends
  paid........................     --       --            --          (558)         --            (558)
Foreign currency translation
  adjustment..................     --       --            --            --          32              32
                                 ----      ---      --------     ---------       -----        --------
Balance at June 30, 1997......    169        5       189,422       (57,850)         38         131,784
Conversion of Class A common
  stock to common stock.......      3       (3)           --            --          --              --
Exercise of stock options, net
  of tax benefits and employee
  stock plan purchases........      3       --         7,716            --          --           7,719
Net loss......................     --       --            --       (42,259)         --         (42,259)
Unearned compensation, net....     --       --          (896)           --          --            (896)
Preferred stock dividends
  paid........................     --       --            --          (246)         --            (246)
Foreign currency translation
  adjustment..................     --       --            --            --        (818)           (818)
                                 ----      ---      --------     ---------       -----        --------
Balance at June 30, 1998......   $175      $ 2      $196,242     $(100,355)      $(780)       $ 95,284
                                 ====      ===      ========     =========       =====        ========
</TABLE>
 
          See accompanying notes to consolidated financial statements.
                                       F-5
<PAGE>   34
 
              INTEGRATED PROCESS EQUIPMENT CORP. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                  YEARS ENDED JUNE 30,
                                                            ---------------------------------
                                                              1998         1997        1996
                                                            ---------    --------    --------
<S>                                                         <C>          <C>         <C>
Cash flows from operating activities:
  Net loss................................................  $ (42,259)   $(33,746)   $(10,657)
  Adjustments to reconcile net loss to net cash provided
     by
     (used in) operating activities:
     Depreciation and amortization........................     11,021       9,496       6,328
     Deferred taxes.......................................     26,222     (10,527)    (15,855)
     Loss on disposal of IPEC Clean, net of taxes.........     10,578      24,950          --
     Program discontinuance charge........................         --      17,601          --
     Purchased research and development...................         --          --      36,961
     Cost of warrants issued..............................         --       1,059          --
     Changes in operating assets and liabilities, net of
       effects of acquisitions:
       Accounts receivable................................      2,607     (11,584)    (10,432)
       Inventories........................................    (22,320)    (30,293)        521
       Prepaid expenses and other assets..................       (789)       (140)       (487)
       Accounts payable...................................     (7,057)      5,484      (7,054)
       Accrued liabilities................................     (4,848)      1,624       3,062
       Net assets of discontinued operations..............       (802)      2,306       7,349
                                                            ---------    --------    --------
          Net cash provided by (used in) operating
            activities....................................    (27,647)    (23,770)      9,736
                                                            ---------    --------    --------
Cash flows from investing activities:
  Purchase of property, plant and equipment...............    (16,994)     (3,703)    (36,571)
  Proceeds from sale of property, plant and equipment.....         --      20,417         752
  Purchases of short-term investments.....................   (545,536)         --          --
  Proceeds from maturity of short-term investments........    475,504          --          --
  Purchase of subsidiaries, net of cash acquired..........         --          --     (23,641)
                                                            ---------    --------    --------
          Net cash provided by (used in) investing
            activities....................................    (87,026)     16,714     (59,460)
                                                            ---------    --------    --------
Cash flows from financing activities:
  Proceeds from long-term debt............................    111,181      15,214      35,787
  Repayment of notes payable..............................       (124)     (1,356)    (24,000)
  Net proceeds from issuance of common stock and
     warrants.............................................      5,407      11,701       5,544
  Payment of preferred stock dividends....................       (246)       (558)       (439)
  Repayment of long-term debt and capital leases..........    (27,285)    (12,046)    (21,631)
  Net proceeds from issuance of Series C preferred
     stock................................................         --      23,400          --
                                                            ---------    --------    --------
          Net cash provided by (used in) financing
            activities....................................     88,933      36,355      (4,739)
                                                            ---------    --------    --------
Effect of exchange rate changes on cash...................       (818)         32          (2)
                                                            ---------    --------    --------
          Net increase (decrease) in cash and cash
            equivalents...................................    (26,558)     29,331     (54,465)
Cash and cash equivalents, beginning of year..............     40,656      11,325      65,790
                                                            ---------    --------    --------
Cash and cash equivalents, end of year....................  $  14,098    $ 40,656    $ 11,325
                                                            =========    ========    ========
</TABLE>
 
          See accompanying notes to consolidated financial statements.
                                       F-6
<PAGE>   35
 
              INTEGRATED PROCESS EQUIPMENT CORP. AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
        (IN THOUSANDS, EXCEPT PERCENTAGES, SHARES AND PER SHARE AMOUNTS)
 
(1) ORGANIZATION
 
     Integrated Process Equipment Corp. (IPEC) and subsidiaries (the Company) is
a supplier of chemical mechanical planarization (CMP) systems used in the
manufacture of semiconductors and advanced plasma-assisted chemical etching
equipment and metrology equipment for use primarily in manufacturing silicon
wafers and semiconductor devices.
 
  Acquisitions
 
     IPEC Planar Portland
 
     On October 30, 1995, the Company acquired all of the outstanding common
stock of GAARD Automation, Inc. (GAARD), a privately-owned company that
developed and sold an advanced high-throughput CMP system for metal
planarization. On January 1, 1997, GAARD was merged into IPEC Planar, Inc., a
wholly owned subsidiary of IPEC. The purchase price consisted of cash of $12
million and notes payable and long-term debt of $18.9 million. Notes payable of
$15 million were subsequently repaid in fiscal 1996.
 
     The purchase price was allocated to the assets acquired (including cash of
$1.3 million) and liabilities assumed based on their fair values as follows:
 
<TABLE>
<S>                                                          <C>
Purchase price:
  Cash.....................................................  $12,000
  Notes payable............................................   15,700
  Long-term debt...........................................    3,223
  Costs of acquisition.....................................      620
                                                             -------
          Total............................................  $31,543
                                                             =======
Assets acquired and liabilities assumed:
  Current assets...........................................  $ 7,958
  Property, plant and equipment............................      128
  Deferred income taxes....................................    1,010
  Purchased research and development.......................   28,793
  Current liabilities......................................   (6,346)
                                                             -------
          Total............................................  $31,543
                                                             =======
</TABLE>
 
     The purchased research and development was charged to operations upon
acquisition. The acquisition was accounted for as a purchase, and accordingly,
the accompanying consolidated financial statements include the results of GAARD
from the date of acquisition.
 
     The purchased research and development included one potential product and
was valued using a discounted cash flow analysis. The valuation did not exceed
the estimated replacement cost to the Company. The product, a CMP tool, was in
the product definition stage at the time of the acquisition, and there were no
future alternative uses for this product. The Company believes that the
technology had no separate economic value and the technology was expensed as
purchased research and development cost at the time of acquisition.
 
     IPEC Precision
 
     On December 29, 1995, the Company's subsidiary IPEC Precision, Inc.
acquired substantially all of the assets constituting the Precision Materials
Operation of Hughes Danbury Optical Systems, Inc. (HDOS). IPEC Precision
(formerly HDOS) was engaged in the design, manufacture, and sale of precision
equipment,
 
                                       F-7
<PAGE>   36
              INTEGRATED PROCESS EQUIPMENT CORP. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
based on proprietary plasma-assisted chemical etching and metrology
technologies, for use in the production of advanced semiconductor wafers and
devices, and provided wafer processing services that use such proprietary
technology and equipment. The purchase price consisted of cash of $11.5 million
and notes payable of $10.4 million. The notes payable were paid in fiscal 1996
and 1997.
 
     The purchase price was allocated to the assets acquired and liabilities
assumed based on their fair values as follows:
 
<TABLE>
<S>                                                          <C>
Purchase price:
  Cash.....................................................  $11,517
  Notes payable............................................   10,356
  Costs of acquisition.....................................      725
                                                             -------
          Total............................................  $22,598
                                                             =======
Assets acquired and liabilities assumed:
  Current assets...........................................  $   879
  Property, plant and equipment............................    6,190
  Deferred income taxes....................................      400
  Patents..................................................    6,222
  Assembled workforce......................................    1,622
  Purchased research and development.......................    8,168
  Current liabilities......................................     (883)
                                                             -------
          Total............................................  $22,598
                                                             =======
</TABLE>
 
     The purchased research and development was charged to operations upon
acquisition. The acquisition was accounted for as a purchase and, accordingly,
the accompanying consolidated financial statements include the results of IPEC
Precision from the date of acquisition.
 
     The purchased research and development included four potential products and
was valued using a discounted cash flow analysis. The valuation did not exceed
the estimated replacement cost to the Company. Of the four "in-process" products
acquired, two were in the product definition stage and two products had been
conceptually outlined but had not gone through the product definition stage. The
Company believes that the technology had no separate economic value and the
technology was expensed as purchased research and development cost at the time
of acquisition.
 
     Pro Forma
 
     Pro forma unaudited consolidated operations data from continuing operations
(excluding nonrecurring charges for purchased research and development and
discontinued operations), assuming all acquisitions had taken place on July 1,
1995, is as follows:
 
<TABLE>
<CAPTION>
                                                           YEAR ENDED
                                                          JUNE 30, 1996
                                                          -------------
<S>                                                       <C>
Revenue.................................................    $156,839
Net income..............................................    $ 13,587
Net income per share....................................    $    .94
</TABLE>
 
                                       F-8
<PAGE>   37
              INTEGRATED PROCESS EQUIPMENT CORP. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
  Principles of Consolidation
 
     The consolidated financial statements include the accounts of IPEC and its
subsidiaries. All significant intercompany balances and transactions have been
eliminated in consolidation.
 
  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.
 
  Cash and Cash Equivalents
 
     All highly liquid securities on deposit with banks, including marketable
securities purchased with original maturities of three months or less at the
date of purchase, are considered to be cash equivalents. As of June 30, 1997,
the Company has classified marketable securities of $10 million with maturities
of less than three months as cash equivalents. The Company intends to hold these
securities to maturity.
 
  Short-Term Investments
 
     Short-term investments have an original maturity of less than eighteen
months and a remaining maturity of one year or less. The Company's short-term
investments are classified as held to maturity and carried at amortized cost as
the Company has the ability and intent to hold these securities until maturity.
 
     A decline in the market value of any security below cost that is deemed to
be other than temporary results in a reduction in carrying amount to fair value.
The impairment is charged to earnings and a new carrying value for the security
is established. Premiums and discounts are amortized or accreted over the life
of the related security as an adjustment to yield using the effective interest
method. Dividend and interest income are recognized when earned.
 
  Concentration of Credit Risk
 
     The Company sells products and services primarily to semiconductor
manufacturers, and extends credit based on an evaluation of the customer's
financial condition, generally without requiring collateral. Exposure to losses
on receivables is principally dependent on each customer's financial condition.
The Company monitors its exposure for credit losses and maintains allowances for
anticipated losses. At June 30, 1998, accounts receivable from the Company's
largest customer was $14 million.
 
  Inventories
 
     Inventories are stated at the lower of cost (first-in, first-out method) or
market.
 
  Property, Plant and Equipment
 
     Property, plant and equipment are stated at cost and are depreciated on the
straight-line method over the estimated useful lives of the assets which range
from three to fifteen years. Equipment recorded under capital leases is stated
at the lower of fair market value or the present value of minimum lease payments
at the inception of the lease. Equipment recorded under capital leases and
leasehold improvements are amortized using the straight-line method over the
shorter of the lease term or the estimated useful lives of the related assets.
 
                                       F-9
<PAGE>   38
              INTEGRATED PROCESS EQUIPMENT CORP. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
  Intangible Assets
 
     Intangible assets have been allocated among various categories based on
their estimated fair value upon acquisition as determined by management or by
independent appraisal. The Company continually evaluates whether events and
circumstances have occurred that indicate the estimated useful life of
intangible assets may warrant revision or that the remaining balance may not be
recoverable. When factors indicate that the asset should be evaluated for
possible impairment, the Company uses an estimate of the related undiscounted
net cash flows generated by the asset over the remaining estimated life of the
asset in measuring whether the asset is recoverable. Material factors which may
alter the useful life of the asset or determine that the balance may not be
recoverable include effects of new technologies, obsolescence, demand,
competition and other economic factors.
 
     Goodwill represents the excess cost over the fair value of tangible and
intangible assets acquired and is amortized over 10 years using the
straight-line method. Patents are amortized over 5 to 10 years using the
straight-line method.
 
  Impairment of Long-Lived Assets
 
     The Company records impairment losses on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount.
 
  Warranty Expense
 
     The Company warrants its products for a period of one year or longer upon
customer acceptance. Future estimated warranty costs are charged to operations
at the time of sale.
 
  Revenue Recognition
 
   
     Sales of the Company's products are recorded upon customer acceptance, or
shipment if no customer acceptance is required, at which time title passes to
the customer. Customer acceptance refers to the sign off by the customer that
the equipment is complete and has passed all tests satisfactory to the customer.
Installation of the equipment is generally completed within 30 to 60 days of
acceptance. Service revenue is recognized upon completion of the service.
    
 
  Research and Development
 
     Expenditures for research and development are charged to operations as
incurred.
 
  Income Taxes
 
     The Company utilizes the method of accounting for income taxes prescribed
by Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (SFAS No. 109). Pursuant to SFAS No. 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which these temporary differences are expected to be
recovered or settled.
 
  Loss per Share of Common Stock
 
     During fiscal 1998, the Company adopted Financial Accounting Standards
Board (FASB) SFAS No. 128, "Earnings per Share" (SFAS No. 128). Earnings (loss)
per share for all prior periods have been restated to conform to the provisions
of SFAS 128. Basic earnings per share 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
earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common
 
                                      F-10
<PAGE>   39
              INTEGRATED PROCESS EQUIPMENT CORP. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
stock or resulted in the issuance of common stock that then shared in the
earnings of the Company. In calculating net loss per common share for 1998, 1997
and 1996, 1.4 million, 1.2 million and 2.2 million common stock equivalent
shares consisting of stock options, warrants, and convertible preferred stock
have been excluded because their inclusion would have been anti-dilutive.
 
  Stock Based Compensation
 
     In accordance with the provisions of Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees, the Company measures
stock-based compensation expense as the excess of the market price at the grant
date over the amount the employee must pay for the stock. The Company's policy
is to generally grant stock options at fair market value at the date of grant,
so no compensation expense is recognized. As permitted, the Company has elected
to adopt only the disclosure provisions of SFAS No. 123, Accounting for
Stock-Based Compensation (see note 10).
 
  Foreign Currency Translation
 
     The functional currency for the Company's foreign operations is their local
currency. Assets and liabilities of foreign operations are translated into U.S.
dollars using current exchange rates at the balance sheet date, and revenue and
expenses are translated into U.S. dollars using average exchange rates for the
year. The effects of foreign currency translation adjustments are included as a
separate component of stockholders' equity. Transaction gains and losses are
included in operations and were not significant for the years ended June 30,
1998, 1997 and 1996.
 
  Reclassifications
 
     Certain 1996 and 1997 balances have been reclassified to conform to the
1998 presentation.
 
(3) INVENTORIES
 
     Inventories are summarized as follows:
 
<TABLE>
<CAPTION>
                                                                JUNE 30,
                                                           ------------------
                                                            1998       1997
                                                           -------    -------
<S>                                                        <C>        <C>
Raw materials............................................  $48,422    $35,977
Work in process..........................................   19,880     18,182
Finished goods...........................................    5,103      3,549
                                                           -------    -------
                                                            73,405     57,708
Less: inventory obsolescence allowance...................   (6,356)   (12,979)
                                                           -------    -------
                                                           $67,049    $44,729
                                                           =======    =======
</TABLE>
 
     In the second quarter of fiscal 1997, the Company recorded a pretax
nonrecurring charge of $17.6 million, related to write-downs of inventories of
$9.0 million, write-downs of property, plant and equipment of $4.1 million and
the accrual of related noncancelable purchase orders of $4.5 million related to
the discontinuance of the Avanti 672 product development program. Inventory
associated with the Avanti 672 program was $900 thousand and $12.6 million,
primarily in raw materials, with related allowances of $900 thousand and $10.1
million at June 30, 1998 and 1997, respectively.
 
                                      F-11
<PAGE>   40
              INTEGRATED PROCESS EQUIPMENT CORP. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
(4) DISCONTINUED OPERATIONS
 
     In the second quarter of fiscal 1997, the Company announced its decision to
focus its resources on manufacturing CMP and CMP related equipment. As a result
of this decision, the Company adopted a plan for the disposition by sale or
closure of IPEC Clean in calendar 1997.
 
     IPEC Clean has been accounted for as a discontinued operation and,
accordingly, its results of operations and financial position are segregated for
all periods presented in the accompanying consolidated financial statements.
Revenue, related losses and income taxes associated with the discontinued
operations are as follows:
 
<TABLE>
<CAPTION>
                                                                JUNE 30,
                                                           ------------------
                                                            1997       1996
                                                           -------    -------
<S>                                                        <C>        <C>
Revenue..................................................  $ 4,609    $35,810
                                                           -------    -------
Loss from discontinued operations before taxes...........   (5,495)    (1,674)
Income tax benefit.......................................   (1,881)      (380)
                                                           -------    -------
Loss from discontinued operations, net of taxes..........  $(3,614)   $(1,294)
                                                           =======    =======
</TABLE>
 
     The effective income tax benefit for discontinued operations differs from
the Company's effective tax rate primarily as a result of nondeductible
amortization of intangible assets.
 
     The Company recorded a pretax charge of $27.2 million to write down
intangible assets, accounts receivable, inventory, equipment and other assets to
estimated net realizable value and to record additional liabilities in the
second quarter of fiscal 1997. A charge of $3.0 million was also recorded to
reflect the estimated phase out costs and losses from operations associated with
IPEC Clean until disposition. The tax benefit associated with these charges was
$5.2 million.
 
     Following the decision to dispose of IPEC Clean in calendar 1997, the
Company entered into negotiations to sell its remaining assets. The
deteriorating business climate in the Pacific Rim resulted in customers delaying
expected purchases from IPEC Clean and the Company was unable to consummate a
sale. The Company closed IPEC Clean in the third quarter of fiscal 1998 and is
in the process of disposing of its assets. A charge of $10.6 million to
write-down accounts receivable, inventory, equipment and other assets to
liquidation value and to record additional liabilities was recorded in fiscal
1998.
 
     The net assets of the discontinued operations at June 30, 1997 have been
reclassified in the accompanying consolidated balance sheet as follows:
 
<TABLE>
<S>                                                          <C>
Current assets.............................................  $ 7,078
Current liabilities........................................   (4,615)
                                                             -------
                                                             $ 2,463
                                                             =======
</TABLE>
 
                                      F-12
<PAGE>   41
              INTEGRATED PROCESS EQUIPMENT CORP. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
(5) PROPERTY, PLANT AND EQUIPMENT
 
     Property, plant and equipment is summarized as follows:
 
<TABLE>
<CAPTION>
                                                               JUNE 30,
                                                         --------------------
                                                           1998        1997
                                                         --------    --------
<S>                                                      <C>         <C>
Buildings..............................................  $    151    $    151
Machinery and equipment................................    43,090      33,077
Building and leasehold improvements....................     3,676       3,384
Office furniture and fixtures..........................     1,172       1,067
Vehicles...............................................        64          84
Equipment recorded under capital leases................     5,192       4,629
                                                         --------    --------
                                                           53,345      42,392
Less: accumulated depreciation and amortization........   (18,462)    (16,930)
                                                         --------    --------
                                                         $ 34,883    $ 25,462
                                                         ========    ========
</TABLE>
 
(6) INTANGIBLE ASSETS
 
     Intangible assets are summarized as follows:
 
<TABLE>
<CAPTION>
                                                                JUNE 30,
                                                           ------------------
                                                            1998       1997
                                                           -------    -------
<S>                                                        <C>        <C>
Goodwill.................................................  $ 6,910    $ 6,910
Patents..................................................   11,398     11,398
Assembled workforce......................................       --      1,622
                                                           -------    -------
                                                            18,308     19,930
Less: accumulated amortization...........................   (9,488)    (8,132)
                                                           -------    -------
                                                           $ 8,820    $11,798
                                                           =======    =======
</TABLE>
 
(7) ACCRUED LIABILITIES
 
     Accrued liabilities are summarized as follows:
 
<TABLE>
<CAPTION>
                                                                JUNE 30,
                                                           ------------------
                                                            1998       1997
                                                           -------    -------
<S>                                                        <C>        <C>
Accrued warranties.......................................  $ 6,639    $ 4,382
Accrued interest.........................................    2,095         58
Accrued payroll and benefits.............................    1,821      1,943
Accrued vacation.........................................    1,492      1,413
Accrued commissions......................................    1,301      1,558
Accrued losses for phase-out of discontinued
  operations.............................................    3,956        877
Accrued income taxes.....................................      168        775
Accrued losses on noncancelable purchase commitments for
  discontinued program...................................       --      3,381
Other accrued liabilities................................    4,056      4,180
                                                           -------    -------
                                                           $21,528    $18,567
                                                           =======    =======
</TABLE>
 
                                      F-13
<PAGE>   42
              INTEGRATED PROCESS EQUIPMENT CORP. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
(8) LONG-TERM DEBT
 
     Long-term debt is summarized as follows:
 
<TABLE>
<CAPTION>
                                                               JUNE 30,
                                                          -------------------
                                                            1998       1997
                                                          --------    -------
<S>                                                       <C>         <C>
Convertible subordinated notes(a).......................  $115,000    $    --
Notes payable, bank(b)..................................        --     25,000
Note payable, GAARD acquisition(c)......................       395      1,538
Capital lease obligations, interest at rates ranging
  from 8.7% to 10.9%(d).................................     3,238      3,513
Other notes payable.....................................        --         94
                                                          --------    -------
                                                           118,633     30,145
Less: current portion...................................     1,555     10,599
                                                          --------    -------
Long-term debt, net.....................................  $117,078    $19,546
                                                          ========    =======
</TABLE>
 
---------------
(a) 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
    ("Notes"). The notes were subsequently registered with the Securities and
    Exchange Commission in fiscal 1998. 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, described
    below. Remaining portions of proceeds may be used to expand the Company's
    sales and service operations in Asia 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 $3.8 million incurred in
    connection with the private placement have been included in other assets and
    are being amortized over seven years.
 
(b) The Company entered into a loan agreement in April 1996 with a bank. Under
    the terms of the agreement, as modified, the Company received a $10.0
    million term loan and a $20 million revolving loan facility, since modified
    to $15 million, to provide working capital and for general corporate
    purposes. The loan agreement was further modified to allow a $5 million
    increase of the revolving loan facility from the beginning of the last week
    of each fiscal quarter through the end of the first week of the subsequent
    quarter. The outstanding balance on the revolving loan facility was $25.0
    million at June 30, 1997.
 
    The weighted average interest rate at June 30, 1997 on the outstanding
    balance was 8.32%. There have been no borrowings under this facility since
    September 1997. The commitments made under the revolving credit facility
    expired in April 1998, but were extended until June 22, 1998. The revolving
    loan facility was secured by a blanket lien on substantially all of the
    assets of the Company and its subsidiaries. The Company is currently
    negotiating a new credit facility with the bank. The $10.0 million term loan
    was repaid in the second quarter of fiscal 1997 in connection with the
    sale/leaseback transaction of the Company's Phoenix manufacturing and
    administrative facility described in Note 13.
 
(c) The Company issued a $3.2 million promissory note to the former owner of
    GAARD. The note bears interest at 5.58% per year, principal and interest are
    payable in monthly installments. The note matures in September 1998 and is
    unsecured.
 
                                      F-14
<PAGE>   43
              INTEGRATED PROCESS EQUIPMENT CORP. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
(d) The Company entered into lease financing arrangements for certain equipment
    that expire at various dates through December 2001.
 
     Interest expense to related parties was $304 thousand for the year ended
June 30, 1996.
 
     The future maturities of long-term debt as of June 30, 1998 are as follows:
 
<TABLE>
<CAPTION>
                  YEARS ENDING JUNE 30,
                  ---------------------
<S>                                                         <C>
      1999................................................  $  1,555
      2000................................................     1,214
      2001................................................       815
      2002................................................        49
      2003................................................        --
      Thereafter..........................................   115,000
                                                            --------
      Total...............................................  $118,633
                                                            ========
</TABLE>
 
(9) STOCKHOLDERS' EQUITY
 
  Preferred Stock
 
     The holders of Series B preferred stock are entitled to an annual
cumulative dividend amounting to $5.59 per share, payable semiannually on
December 31 and June 30, commencing June 30, 1994. Each share of the Series B-1
preferred stock, Series B-2 preferred stock and Series B-3 preferred stock is
convertible into 12.54, 11.41 and 15.00 shares of common stock, respectively.
During fiscal 1996, 268 shares of Series B-3 preferred stock were converted into
4,020 shares of common stock, in fiscal 1997, 13,738 shares of Series B-1, B-2
and B-3 preferred stock were converted into 198,522 shares of common stock, and
in fiscal 1998, 135 shares of Series B-1 preferred stock were converted into
1,692 shares of common stock. During fiscal 1997, 5,370 shares of Series B-1
preferred stock were released from escrow to the selling stockholders of Westech
(including a director) upon settlement of the purchase price of Westech. In
accordance with the escrow settlement, the remaining 5,369 shares of the Series
B-1 preferred stock held in escrow were retired.
 
     The Company completed a $25.0 million equity financing in fiscal 1997. The
Company sold 100,000 shares of newly issued Series C convertible preferred
stock. At the holder's option, each share of Series C convertible preferred
stock was convertible at a premium over an average of the volume weighted
average daily market prices of the common stock. On February 25, 1997 all shares
of Series C convertible preferred stock converted into 1,283,961 shares of
common stock.
 
     In connection with the issuance of the Series C convertible preferred
stock, warrants were issued to acquire up to 476,352 shares of the Company's
common stock. These warrants may generally be exercised from and after June 16,
1998 until December 16, 2002 at an exercise price of $24.57 per share.
 
  Class A Common Stock
 
     Each share of Class A common stock is entitled to four votes and can be
converted into one share of the Company's common stock. Each share of common
stock is entitled to one vote.
 
  Unit Purchase Options
 
     Concurrent with the Company's secondary offering in February 1994, the
Company issued unit purchase options to the underwriter for the purchase of
1,800 units at an exercise price of $1,650 per unit. Each unit consists of 130
shares of common stock and 78 Class B warrants which expire in 1999. At June 30,
1998, 103.6
 
                                      F-15
<PAGE>   44
              INTEGRATED PROCESS EQUIPMENT CORP. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
of the original 1,800 units were outstanding. Class B warrants included in unit
purchase options outstanding at June 30, 1998 could result in the issuance of
8,080 shares of the Company's common stock, if exercised.
 
  Warrants
 
     The following table summarizes warrant activity:
 
<TABLE>
<CAPTION>
                                   CLASS C      COMMON       COMMON       COMMON
                                     (A)          (B)          (C)          (D)         TOTAL
                                  ---------    ---------    ---------    ---------    ---------
<S>                               <C>          <C>          <C>          <C>          <C>
Exercise price..................  $    2.52      $ 29.25     $  14.66     $  24.57           --
Expiration......................    8/28/97     12/26/00     12/31/99     12/16/02           --
Outstanding at June 30, 1996....  $ 137,500      $10,000     $     --     $     --    $ 147,500
  Exercised in fiscal 1997......   (137,500)          --           --           --     (137,500)
  Issued in connection with an
    agreement with a major
    customer to accelerate
    certain deliveries in fiscal
    1997........................         --           --      250,000           --      250,000
  Issued in connection with
    issuance of Series C
    preferred stock in fiscal
    1997........................         --           --           --      476,352      476,352
                                  ---------    ---------    ---------    ---------    ---------
Outstanding at June 30, 1997 and
  1998..........................  $      --      $10,000     $250,000     $476,352    $ 736,352
                                  =========    =========    =========    =========    =========
</TABLE>
 
---------------
(a) Upon exercise, the holder will receive one share of common stock for each
    warrant exercised.
 
(b) These warrants were issued in connection with services provided during the
    acquisition of GAARD and were assigned a value of $100 thousand.
 
(c) These warrants were issued in connection with an agreement to accelerate
    planned orders from a significant customer and were assigned a value of $1.1
    million.
 
(d) These warrants were issued in connection with the Series C convertible
    preferred stock and assigned a value of $4.8 million.
 
(10) EMPLOYEE BENEFITS
 
     The Company has a defined contribution plan under Section 401(k) of the
Internal Revenue Code that covers all eligible employees. Participants may
contribute up to 15% of their salary. Participants vest immediately in their own
contributions and over a five-year period in the Company's matching
contributions. The Company made matching contributions of $350 thousand, $211
thousand and $189 thousand in fiscal 1998, 1997 and 1996, respectively.
 
     The Company's 1994 Employee Stock Purchase Plan (the "Purchase Plan")
provides employees with a convenient means to acquire an equity interest in the
Company. Eligible employees of the Company can purchase common stock through
payroll deductions at 85% of the fair market value of the stock. Payroll
deductions for the purchase of stock may not exceed 10% of an employee's base
compensation or $25 thousand. As of June 30, 1998, 265,417 shares have been
purchased under this plan. The maximum number of shares that may be issued under
this plan is 1,000,000.
 
     The Company's 1992 Stock Option Plan (the "Option Plan") provides for the
issuance of incentive stock options and nonqualified stock options to purchase
up to 4,900,000 shares of common stock to employees, directors and consultants.
The grants vest over periods ranging up to five years. Under the Option Plan,
options may be granted to purchase shares of the Company's common stock at not
less than fair market value at the date of grant, and are exercisable for a
period not exceeding ten years from that date.
 
                                      F-16
<PAGE>   45
              INTEGRATED PROCESS EQUIPMENT CORP. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The Company granted to an officer 50,000 shares of Common Stock which vest
monthly from September 1997 through February 2000. The Company deferred the
related compensation of $1.3 million and is amortizing the cost over the vesting
period. In 1998, $448 thousand was recorded as compensation expense.
 
     Effective in fiscal 1997 the Company adopted the disclosure requirements of
SFAS No. 123, Accounting for Stock-Based Compensation. As permitted under SFAS
No. 123, the Company will continue to measure stock-based compensation expense
as the excess of the market price at the grant date over the amount the employee
must pay for the stock.
 
     SFAS No. 123 requires disclosure of pro forma net earnings and pro forma
net earnings per share as if the fair value based method had been applied in
measuring compensation expense for awards granted in fiscal 1998, 1997 and 1996.
Management believes that the fiscal 1998, 1997 and 1996 pro forma amounts may
not be representative of the effects of stock-based awards on future pro forma
net earnings and pro forma net earnings per share because, among other reasons,
those pro forma amounts exclude the pro forma compensation expense related to
unvested stock options granted before fiscal 1996.
 
     At June 30, 1998, there were 853,842 shares available for grant under the
Option Plan. The per share weighted-average fair value of stock options granted
under the Option Plan for the years ended June 30, 1998 and 1997 was $15.23 and
$9.30, respectively, based on the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions for both years:
expected dividend yield of 0%, expected volatility of 90%, risk-free interest
rate of 6.25% and an expected life of three years.
 
     The following table summarizes the activity under this plan and includes
200,000 options granted outside the plan:
 
<TABLE>
<CAPTION>
                             NUMBER OF                        WEIGHTED AVERAGE
                              OPTIONS      EXERCISE PRICE      EXERCISE PRICE     EXERCISABLE
                             ----------    ---------------    ----------------    -----------
<S>                          <C>           <C>                <C>                 <C>
Outstanding, June 30,
  1995.....................   2,857,000    $ 7.75 - $28.75         $21.70            655,000
                                                                                   =========
Granted....................   1,256,000    17.88 -  31.00           22.47
Exercised..................    (180,000)    7.75 -  20.75           10.85
Cancelled..................    (607,000)   18.38 -  31.00           27.17
Forfeitures................    (178,000)    9.00 -  31.00           21.89
                             ----------
Outstanding, June 30,
  1996.....................   3,148,000    $ 7.75 - $31.00         $21.56          1,103,000
                                                                                   =========
Granted....................   2,525,000    10.88 -  25.88           14.47
Exercised..................    (473,000)    7.75 -  20.75           10.73
Cancelled..................  (2,227,000)   15.25 -  31.00           27.73
Forfeitures................    (278,000)    9.00 -  28.75           19.13
                             ----------
Outstanding, June 30,
  1997.....................   2,695,000    $ 7.75 - $28.75         $14.56          1,070,000
                                                                                   =========
Granted....................     803,000    11.50 -  33.00           25.31
Exercised..................    (318,000)    7.75 -  26.88           13.74
Forfeitures................    (112,000)   10.88 -  33.00           18.56
                             ----------
Outstanding, June 30,
  1998.....................   3,068,000    $ 7.75 - $33.00         $14.68          1,464,000
                             ==========                                            =========
</TABLE>
 
                                      F-17
<PAGE>   46
              INTEGRATED PROCESS EQUIPMENT CORP. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The following table summarizes information about the stock options
outstanding at June 30, 1998:
 
<TABLE>
<CAPTION>
                               WEIGHTED AVERAGE      WEIGHTED
   RANGE OF        OPTIONS        REMAINING          AVERAGE         OPTIONS     WEIGHTED AVERAGE
EXERCISE PRICE   OUTSTANDING   CONTRACTUAL LIFE   EXERCISE PRICE   EXERCISABLE    EXERCISE PRICE
--------------   -----------   ----------------   --------------   -----------   ----------------
<S>              <C>           <C>                <C>              <C>           <C>
$ 7.75 - 11.50      257,000          6.25             $ 9.02          239,000         $ 8.88
         13.88    1,819,000          8.10              13.88        1,040,000          13.88
 14.00 - 25.88      263,000          9.05              20.10           34,000          20.85
 28.13 - 33.00      729,000          8.75              27.24          151,000          28.13
                  ---------          ----             ------        ---------         ------
$ 7.75 - 33.00    3,068,000          8.18             $17.18        1,464,000         $14.68
                  =========          ====             ======        =========         ======
</TABLE>
 
     On April 3, 1996, the Board of Directors of the Company approved a
repricing of options granted after April 20, 1995. Employees, excluding officers
and directors, who were issued stock options subsequent to April 20, 1995 and
who were active in their respective positions on April 3, 1996, could elect to
keep their options to buy common stock at the original grant price or reprice
their options to $17.88 per share, the fair market value of the common stock on
April 2, 1996. If the option holder elected to reprice the options to $17.88 per
share, the vesting commencement date was extended by periods ranging from four
months to one year. Options for 607,000 shares were repriced.
 
     On August 16, 1996, the Board of Directors of the Company approved a
repricing of options granted after January 20, 1995, and prior to August 16,
1996, with an exercise price exceeding $13.88 per share. Employees, officers and
directors holding options granted with an exercise price exceeding $13.88 per
share, who were active in their respective positions on August 16, 1996, could
elect to keep their options to buy common stock at the original grant price or
reprice their options to $13.88 per share, the fair market value of the common
stock on August 15, 1996. If the option holder elected to reprice the options to
$13.88 per share, the vesting commencement date was extended by periods ranging
from one to thirteen months. Options for 2,227,000 shares were repriced.
 
     Common stock received through the exercise of non-qualified stock options
results in a tax deduction for the Company equivalent to the taxable income
recognized by the optionee at time of exercise. For financial reporting
purposes, the tax effect of this deduction is accounted for as a credit to
additional paid-in capital rather than as a reduction of income tax expense.
Such optionee exercise of options resulted in a tax benefit to the Company of
$1.4 million, $2.1 million and $1.6 million for the years ended June 30, 1998,
1997 and 1996, respectively.
 
     The Company applies APB Opinion No. 25 in accounting for its various stock
plans and, accordingly, no compensation costs for the Purchase Plan or the
Option Plan are reflected in the consolidated financial statements. Had the
Company determined compensation cost in accordance with SFAS No. 123, the
Company's net loss and net loss per share would have been increased to the pro
forma amounts indicated below:
 
<TABLE>
<CAPTION>
                                                   YEARS ENDED JUNE 30,
                                             --------------------------------
                                               1998        1997        1996
                                             --------    --------    --------
<S>                                          <C>         <C>         <C>
Net loss
  As reported..............................  $(42,259)   $(33,746)   $(10,657)
  Pro forma................................   (54,800)    (49,418)    (15,817)
Net loss per common share
  As reported..............................     (2.41)      (2.18)       (.78)
  Pro forma................................     (3.11)      (3.16)      (1.10)
</TABLE>
 
                                      F-18
<PAGE>   47
              INTEGRATED PROCESS EQUIPMENT CORP. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Pro forma net loss reflects only options and warrants granted during the
fiscal years ended June 30, 1998, 1997 and 1996. Therefore, the full impact of
calculating compensation cost for stock options under SFAS No. 123 is not
reflected in the pro forma net loss amounts presented above because compensation
cost is reflected over the option's vesting period and compensation cost for
options granted prior to July 1, 1995 is not considered.
 
(11) MAJOR CUSTOMERS
 
     One customer accounted for 38%, 51%, and 35% of revenue for the fiscal
years ended June 30, 1998, 1997 and 1996, respectively. Another customer
accounted for 12% of revenue for the fiscal year ended June 30, 1998. A third
customer accounted for 11% of revenue for the fiscal year ended June 30, 1996.
 
     Total export sales by geographic region are as follows:
 
<TABLE>
<CAPTION>
                                                    YEARS ENDED JUNE 30,
                                                -----------------------------
                                                 1998       1997       1996
                                                -------    -------    -------
<S>                                             <C>        <C>        <C>
Far East......................................  $44,064    $17,850    $23,738
Europe........................................  $38,410    $20,494    $17,472
Other.........................................  $ 3,610    $   113    $    81
</TABLE>
 
(12) INCOME TAXES
 
     Income tax expense (benefit) is comprised of the following:
 
<TABLE>
<CAPTION>
                                                   YEARS ENDED JUNE 30,
                                              -------------------------------
                                               1998        1997        1996
                                              -------    --------    --------
<S>                                           <C>        <C>         <C>
Current:
  Federal...................................  $    --    $     --    $  7,827
  State.....................................      300         500       1,249
                                              -------    --------    --------
                                                  300         500       9,076
                                              -------    --------    --------
Deferred:
  Federal...................................   23,243      (9,729)    (13,474)
  State.....................................    2,585        (798)     (2,381)
                                              -------    --------    --------
                                               25,828     (10,527)    (15,855)
                                              -------    --------    --------
  Income tax expense (benefit)..............  $26,128    $(10,027)   $ (6,779)
                                              =======    ========    ========
</TABLE>
 
     Income tax expense (benefit) is included in the statements of operations as
follows:
 
<TABLE>
<CAPTION>
                                                    YEARS ENDED JUNE 30,
                                               ------------------------------
                                                1998        1997       1996
                                               -------    --------    -------
<S>                                            <C>        <C>         <C>
Continuing operations........................  $26,128    $ (2,951)   $(6,399)
Discontinued operations......................       --      (7,076)      (380)
                                               -------    --------    -------
                                               $26,128    $(10,027)   $(6,779)
                                               =======    ========    =======
</TABLE>
 
                                      F-19
<PAGE>   48
\              INTEGRATED PROCESS EQUIPMENT CORP. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
  Deferred Income Taxes
 
     The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets, liabilities and the valuation allowance are
as follows:
 
<TABLE>
<CAPTION>
                                                               JUNE 30,
                                                          -------------------
                                                            1998       1997
                                                          --------    -------
<S>                                                       <C>         <C>
Deferred tax assets:
  Warranty reserve......................................  $  2,434    $ 2,033
  Inventory reserve.....................................     2,513      1,547
  Vacation accrual......................................       404        440
  Research and development credits......................     3,874      2,018
  Allowance for losses on program discontinuance........     1,276      7,035
  Allowance for losses on discontinued operations.......     3,789      2,731
  Net operating loss carryforwards......................    28,680     19,772
  Other.................................................     1,869        167
                                                          --------    -------
                                                            44,839     35,743
  Valuation allowance...................................   (40,019)    (7,840)
                                                          --------    -------
                                                            (4,820)    27,903
                                                          --------    -------
Deferred tax liabilities:
  Differences between the tax basis and fair value of
     intangibles and fixed assets acquired..............       561        754
  Depreciation differences..............................     4,259      2,343
                                                          --------    -------
                                                             4,820      3,097
                                                          --------    -------
     Net deferred tax asset.............................  $     --    $24,806
                                                          ========    =======
</TABLE>
 
     The Company has $77.6 million of Federal net operating loss carryforwards
(NOLs) at June 30, 1998 which expire between 2000 and 2013. The Company also has
$3.3 million of Federal research and development tax credit carryforwards
available. These carryforwards begin to expire in 2011.
 
   
     The valuation allowance for deferred taxes was increased by $32.2 million
and $6.1 million during the years ended June 30, 1998 and 1997, respectively.
SFAS No. 109 requires that a valuation allowance be recorded against deferred
tax assets that are less likely than not to be realized. This determination is
dependent on many factors, including the Company's ability to generate taxable
income within the net operating loss carryforward period. Significant negative
results of the fourth quarter of fiscal 1998, including a decline in sales and
backlog, were due to the dramatic downturn in the semiconductor industry and the
Asian economic crisis. Major customers were unable to predict when orders would
increase. The industry instability changed the assumptions used to predict
future projected results of the Company. These new circumstances, combined with
three consecutive years of operating losses as of June 30, 1998, caused a change
in judgment about the realization of the deferred tax assets. As a result, the
Company is unable to predict the level of future sales and ability to generate
income under these circumstances and is predicting tax losses for the next two
years. The Company has established a full valuation allowance against all of its
deferred tax assets. The Company will recognize future benefits only as
reassessment demonstrates they are reasonable. While the need for this valuation
allowance is subject to periodic review, if the allowance is reduced, the tax
benefits attributable to the deferred tax assets will be recorded in future
operations as a reduction of the Company's income tax expense.
    
 
                                      F-20
<PAGE>   49
              INTEGRATED PROCESS EQUIPMENT CORP. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
  Rate Reconciliation
 
     The effective tax rate on income (loss) from continuing operations before
income taxes is different from the federal statutory tax rate. A reconciliation
of the Federal statutory income tax rate to the effective income tax rate is as
follows:
 
<TABLE>
<CAPTION>
                                                               YEARS ENDED JUNE 30,
                                                              -----------------------
                                                              1998     1997     1996
                                                              -----    -----    -----
<S>                                                           <C>      <C>      <C>
Federal income tax benefit at statutory rate................  (34.0)%  (34.0)%  (34.0)%
  State and local taxes.....................................    5.4      4.1     (4.2)
  Research and development tax credits......................     --    (14.3)    (4.4)
  Foreign service corp. deduction...........................  (10.7)      --       --
  Nondeductible expenses, including purchased research and
     development and amortization of goodwill...............   43.3      7.6      5.7
  Change in beginning of year valuation allowance...........  446.7       --       --
  Stock option compensation.................................   23.4       --       --
  Other.....................................................   (3.6)      .3     (3.7)
                                                              -----    -----    -----
Total effective income tax rate.............................  470.5%   (36.3)%  (40.6)%
                                                              =====    =====    =====
</TABLE>
 
(13) COMMITMENTS AND CONTINGENCIES
 
     The Company is subject to lawsuits and other claims arising in the ordinary
course of business. In the opinion of management, based on consultation with
legal counsel, the effect of such matters will not have a material adverse
effect on the Company's financial position or results of operations.
 
  Sale/Leaseback
 
     The Company completed an $18.7 million sale/leaseback transaction of its
Phoenix manufacturing and administrative facility in the second quarter of
fiscal 1997. The Company leased back the facility for an initial fifteen-year
term with two five-year renewal options. Proceeds from the transaction were used
to repay a $10.0 million term loan with a bank. Annual rental payments will vary
but will range between $2.1 million and $2.4 million over the next five years.
 
     The following is a schedule of the approximate future minimum lease
payments under noncancelable operating leases with terms in excess of one year
as of June 30, 1998:
 
<TABLE>
<CAPTION>
YEARS ENDING JUNE 30,
---------------------
<S>                                                  <C>
1999...............................................  $ 3,367
2000...............................................    3,219
2001...............................................    2,971
2002...............................................    2,927
2003...............................................    2,936
Thereafter.........................................   23,111
                                                     -------
                                                     $38,531
                                                     =======
</TABLE>
 
     Total rent expense under all operating leases for the years ended June 30,
1998, 1997 and 1996 was $3.4 million, $2.6 million and $1.2 million,
respectively.
 
                                      F-21
<PAGE>   50
              INTEGRATED PROCESS EQUIPMENT CORP. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
(14) FAIR VALUE OF FINANCIAL INSTRUMENTS
 
     Statement of Financial Accounting Standards No. 107, "Disclosure about Fair
Value of Financial Instruments," requires that the Company disclose estimated
fair values for its financial instruments. The following summary presents a
description of the methodologies and assumptions used to determine such amounts.
 
  Limitations
 
     Fair value estimates are made at a specific point in time and are based on
relevant market information and information about the financial instrument; they
are subjective in nature and involve uncertainties, matters of judgment and,
therefore, cannot be determined with precision. These estimates do not reflect
any premium or discount that could result from offering for sale, at one time,
the Company's entire holdings of a particular instrument. Changes in assumptions
could significantly affect these estimates.
 
     Since the fair value is estimated as of June 30, 1998, the amounts that
will actually be realized or paid at settlement or maturity of the instruments
could be significantly different.
 
  Short-term Investments, Accounts Receivable, Accounts Payable and Accrued
Liabilities
 
     The carrying amount is assumed to be the fair value because of the
short-term maturity of these instruments.
 
  Notes Payable and Long-Term Debt
 
     The fair value of the Company's notes payable and long-term debt
approximate the terms in the marketplace at which they could be replaced.
Therefore, the fair value approximates the carrying value of these financial
instruments.
 
(15) RELATED PARTY TRANSACTIONS
 
     The Company had purchases of raw materials and services of approximately
$6.6 million, $7.4 million and $8.8 million from companies owned by stockholders
of the Company during the years ended June 30, 1998, 1997 and 1996,
respectively. The Company had payables related to these purchases of $286
thousand and $918 thousand at June 30, 1998 and 1997, respectively.
 
     On December 29, 1995, the Company loaned $900 thousand to the Chairman of
the Company. The loan bears interest at the prime rate and is due on the
earliest to occur of (i) 90 days after the Chairman's ability to sell Company
stock without restriction under Section 16 of the Securities Exchange Act or a
lockup agreement, (ii) immediately on voluntary termination of employment, (iii)
90 days after involuntary termination of employment for "cause," or (iv)
immediately on the sale of a personal residence. The loan is secured by all of
the executive's options to purchase the Company's common stock and shares of
common stock. Included in other assets is a receivable of $171 thousand and $975
thousand related to this loan at June 30, 1998 and 1997, respectively. The loan
was repaid in full in July 1998.
 
                                      F-22
<PAGE>   51
              INTEGRATED PROCESS EQUIPMENT CORP. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
(16) SUPPLEMENTAL FINANCIAL INFORMATION
 
     A summary of additions and deductions related to the allowance for accounts
receivable and inventory obsolescence for the years ended June 30, 1998, 1997
and 1996 follows:
 
<TABLE>
<CAPTION>
                                           BALANCE AT                               BALANCE AT
                                           BEGINNING                                  END OF
                                            OF YEAR      ADDITIONS    DEDUCTIONS       YEAR
                                           ----------    ---------    ----------    ----------
<S>                                        <C>           <C>          <C>           <C>
Allowance for doubtful accounts:
  Year ended June 30, 1998...............   $ 2,188       $ 1,650      $(2,088)      $ 1,750
  Year ended June 30, 1997...............       100         2,088           --         2,188
  Year ended June 30, 1996...............        50            50           --           100
Allowance for inventory obsolescence:
  Year ended June 30, 1998...............    12,979         2,893       (9,516)        6,356
  Year ended June 30, 1997...............     1,952        11,027           --        12,979
  Year ended June 30, 1996...............       985         1,122         (155)        1,952
</TABLE>
 
Supplemental disclosure of cash flow information is as follows:
 
<TABLE>
<CAPTION>
                                                              YEARS ENDED JUNE 30,
                                                           --------------------------
                                                            1998      1997      1996
                                                           ------    ------    ------
<S>                                                        <C>       <C>       <C>
Cash paid for:
  Interest...............................................  $4,724    $1,916    $1,902
                                                           ======    ======    ======
  Income taxes...........................................  $  963    $  510    $3,317
                                                           ======    ======    ======
</TABLE>
 
Supplemental disclosures of noncash investing activities:
 
  The Company made acquisitions of $23,593 for cash in the year ended June 30,
     1996. The purchase prices were allocated to the assets acquired and
     liabilities assumed based on their fair values at the date of acquisition.
     A summary of cash paid for the acquisitions follows:
 
<TABLE>
<S>                                                           <C>
  Purchase price............................................  $ 54,395
  Less cash acquired........................................    (1,269)
  Common stock issued.......................................      (206)
  Notes payable.............................................   (26,056)
  Long-term debt............................................    (3,223)
                                                              --------
                                                              $ 23,641
                                                              ========
</TABLE>
 
                                      F-23
<PAGE>   52
 
                       INTEGRATED PROCESS EQUIPMENT CORP.
                            REPORT ON FORM 10-K FOR
                          THE YEAR ENDED JUNE 30, 1998
 
                               INDEX TO EXHIBITS*
 
   
<TABLE>
<CAPTION>
EXHIBIT
NUMBER                            EXHIBIT NAME
-------                           ------------
<S>       <C>
23.1      Consent of KPMG LLP.
27.1      Financial Data Schedule
</TABLE>
    
 
---------------
*Only exhibits actually filed are listed. Exhibits incorporated by reference are
set forth in the exhibit listing included in Item 14 of the Report on 
Form 10-K/A-1.