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


                                    FORM 10-Q

(MARK ONE)

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

For the quarterly period ended March 31, 1998

                                       OR

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

For the transition period from _______________ to _______________

Commission file number 0-20470

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

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

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

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

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

         Indicate by (X) whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /

         As of May 7, 1998, 223,675 shares of Class A Common Stock and
17,488,449 shares of Common Stock of the registrant were outstanding.

                                  Page 1 of 29
<PAGE>   2
                          PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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

<TABLE>
<CAPTION>
                                                                                    JUNE 30,         MARCH 31,
                                    ASSETS                                            1997             1998
                                                                                    ---------        ---------
                                                                                                    (Unaudited)
<S>                                                                                 <C>              <C>      
Current assets:
    Cash and cash equivalents                                                       $  40,656        $  95,125
    Accounts receivable                                                                45,590           58,416
    Inventories                                                                        44,729           64,348
    Prepaid expenses                                                                      968            2,922
    Deferred income taxes                                                              11,425           12,705
    Net assets of discontinued operations                                               2,463               --
                                                                                    ---------        ---------
       Total current assets                                                           145,831          233,516
                                                                                    ---------        ---------
Property, plant and equipment, net                                                     25,462           35,594
Intangible assets, net                                                                 11,798            9,831
Deferred income taxes                                                                  13,381           13,551
Other assets                                                                            1,593            4,695
                                                                                    ---------        ---------
                                                                                    $ 198,065        $ 297,187
                                                                                    =========        =========

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
    Notes payable                                                                   $     124        $      --
    Current portion of long-term debt                                                  10,599            1,711
    Accounts payable                                                                   17,445           19,080
    Accrued liabilities                                                                18,567           21,896
                                                                                    ---------        ---------
       Total current liabilities                                                       46,735           42,687
Long-term debt, less current portion                                                   19,546          117,459
                                                                                    ---------        ---------
       Total liabilities                                                               66,281          160,146
                                                                                    ---------        ---------
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 14,543 shares at June 30, 1997 and 14,408 shares
        at March 31, 1998.  Liquidation preference of $1,342                               --               --
    Series B-2 cumulative preferred stock.  Authorized 21,478 shares,
        issued and outstanding 19,544 shares at June 30, 1997 and March 31, 1998 
        Liquidation preference of $1,820                                                   --               --
    Series B-3 cumulative preferred stock.  Authorized 21,478 shares,
        issued and outstanding 9,898 shares at June 30, 1997 and March 31, 1998 
        Liquidation preference of $922                                                     --               --
Series D preferred stock, $.01 par value per share. Authorized 50,000 shares,
        1,000 votes per share; no shares issued and outstanding.  Liquidation
        preference of $120 per share                                                       --               --
Common stock, $.01 par value per share.  Authorized 50,000,000 shares;
    one vote per share; issued and outstanding 16,889,071 shares at
    June 30, 1997 and 17,460,484 shares at March 31, 1998                                 169              175
Class A common stock, $.01 par value per share.  Authorized 3,500,000
    shares, four votes per share; issued and outstanding 453,057 shares at
    June 30, 1997 and 223,675 shares at March 31, 1998                                      5                2
Additional paid-in capital                                                            189,422          195,185
Accumulated deficit                                                                   (57,850)         (57,583)
Foreign currency translation adjustment                                                    38             (738)
                                                                                    ---------        ---------
       Total stockholders' equity                                                     131,784          137,041
                                                                                    ---------        ---------
                                                                                    $ 198,065        $ 297,187
                                                                                    =========        =========
</TABLE>

See accompanying notes to condensed consolidated financial statements.


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

<TABLE>
<CAPTION>
                                                                          THREE MONTHS ENDED                NINE MONTHS ENDED
                                                                              MARCH 31,                         MARCH 31,
                                                                     --------------------------        --------------------------
                                                                       1997              1998            1997             1998
                                                                     ---------        ---------        ---------        ---------
<S>                                                                  <C>              <C>              <C>              <C>      
Revenue                                                              $  37,019        $  41,314        $ 102,088        $ 150,467
Cost of goods sold                                                      20,202           27,301           59,725           87,961
                                                                     ---------        ---------        ---------        ---------
  Gross margin                                                          16,817           14,013           42,363           62,506
                                                                     ---------        ---------        ---------        ---------
Operating expenses:
    Research and development                                             5,586            8,706           17,536           23,756
    Selling, general and administrative                                  7,761            8,731           20,878           26,299
    Program discontinuance charge                                           --               --           17,601               --
                                                                     ---------        ---------        ---------        ---------
       Total operating expenses                                         13,347           17,437           56,015           50,055
                                                                     ---------        ---------        ---------        ---------
       Operating income (loss)                                           3,470           (3,424)         (13,652)          12,451
Other income (expense):
    Interest income                                                        203            1,451              406            3,238
    Interest expense                                                      (237)          (1,939)          (1,410)          (4,365)
    Other, net                                                              (3)              (1)             256               16
                                                                     ---------        ---------        ---------        ---------
       Total other income (expense)                                        (37)            (489)            (748)          (1,111)
                                                                     ---------        ---------        ---------        ---------
       Income (loss) from continuing operations before income taxes      3,433           (3,913)         (14,400)          11,340
Income tax expense (benefit)                                             1,305           (1,448)          (4,844)           4,163
                                                                     ---------        ---------        ---------        ---------
       Income (loss) from continuing operations                          2,128           (2,465)          (9,556)           7,177

Discontinued operations:
    Loss from operations of IPEC Clean, Inc., net of taxes                  --               --           (3,614)              --
    Loss on disposal of IPEC Clean, Inc., net of taxes                      --               --          (24,950)          (6,664)
                                                                     ---------        ---------        ---------        ---------
       Net loss from discontinued operations                                --               --          (28,564)          (6,664)
                                                                     ---------        ---------        ---------        ---------
       Net income (loss)                                                 2,128           (2,465)         (38,120)             513
Cumulative dividends on preferred stock                                    (61)             (61)            (223)            (183)
                                                                     ---------        ---------        ---------        ---------
  Net income (loss) attributable to common stockholders              $   2,067        $  (2,526)       $ (38,343)       $     330
                                                                     =========        =========        =========        =========
Earnings (loss) from continuing operations per common share:
   Basic                                                             $     .13        $    (.14)       $    (.65)       $     .40
                                                                     =========        =========        =========        =========
   Diluted                                                           $     .12        $    (.14)       $    (.65)       $     .37
                                                                     =========        =========        =========        =========
Net earnings (loss) per common share:
   Basic                                                             $     .13        $    (.14)       $   (2.53)       $     .02
                                                                     =========        =========        =========        =========
   Diluted                                                           $     .12        $    (.14)       $   (2.53)       $     .02
                                                                     =========        =========        =========        =========
Shares used in basic per share calculation                              15,772           17,642           15,154           17,564
                                                                     =========        =========        =========        =========
Shares used in diluted per share calculation                            18,062           17,642           15,154           19,141
                                                                     =========        =========        =========        =========
</TABLE>

See accompanying notes to condensed consolidated financial statements.


                                       3
<PAGE>   4
       CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
                 FOR THE NINE-MONTH PERIOD ENDED MARCH 31, 1998
                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                                                          
                                         Series B                                  Class A                                Foreign
                                      Preferred Stock      Common Stock          Common Stock    Additional               Currency  
                                     -----------------  -------------------  ------------------    Paid-In   Accumulated Translation
                                     Shares    Amount    Shares      Amount   Shares    Amount     Capital    Deficit    Adjustment
                                     -------   -------  ----------  -------  --------   -------   ---------   --------     -------
<S>                                  <C>       <C>      <C>         <C>      <C>        <C>       <C>        <C>         <C>     
Balance -
  June 30, 1997                       43,985   $    --  16,889,071  $   169   453,057   $     5   $ 189,422   $(57,850)    $    38
Net income                                --        --          --       --        --        --          --        513          --
Conversion of Series B
  Preferred Stock                       (135)       --       1,692       --        --        --          --         --          --
Conversion of Class A
  Common Stock                            --        --     229,382        3  (229,382)       (3)         --         --          --
Exercise of Stock Options
 (including tax benefits of $1,343)       --        --     295,637        3        --        --       6,023         --          --
Employee Stock Purchase Plan              --        --      44,702       --        --        --         770         --          --
Unearned compensation, net                --        --          --       --        --        --      (1,030)        --          --
Cumulative translation adjustment         --                    --       --        --        --          --         --        (776)
Dividends Paid                            --        --          --       --        --        --          --       (246)         --
                                     -------   -------  ----------  -------  --------   -------   ---------   --------     -------
Balance -
   March 31, 1998                     43,850   $    --  17,460,484  $   175   223,675   $     2   $ 195,185   $(57,583)    $  (738)
                                     =======   =======  ==========  =======  ========   =======   =========   ========     =======
</TABLE>

See accompanying notes to condensed consolidated financial statements.


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

<TABLE>
<CAPTION>
                                                                    NINE MONTHS ENDED
                                                                       MARCH 31,
                                                                  --------------------
Cash flows from operating activities:                               1997       1998
                                                                  --------   ---------
<S>                                                               <C>        <C>      
 Net income (loss)                                                $(38,120)  $     513
 Adjustments to reconcile net income (loss) to net
  cash (used in) operating activities:
   Program discontinuance charge                                    17,601          --
   Loss on disposal of IPEC Clean, net of taxes                     24,950       6,664
   Depreciation and amortization                                     8,378       8,168
   Deferred tax expense (benefit)                                  (11,162)      3,807
   Changes in assets and liabilities:
    (Increase) in accounts receivable                              (15,877)    (11,972)
    (Increase) in inventories                                      (20,523)    (20,349)
    (Increase) in prepaid expenses and other assets                   (356)     (1,237)
    Increase in accounts payable                                     1,982       1,580
    Increase (decrease) in accrued liabilities                       4,968      (3,750)
    (Increase) decrease in net assets of discontinued operations       836        (802)
                                                                  --------   ---------
     Net cash used in operating activities                         (27,323)    (17,378)
                                                                  --------   ---------
Cash flows from investing activities:
 Purchases of property and equipment                                (2,579)    (15,863)
 Proceeds from sale of property and equipment                       20,417          --
                                                                  --------   ---------
     Net cash provided by (used in) investing activities            17,838     (15,863)
                                                                  --------   ---------
Cash flows from financing activities:
 Proceeds from long-term debt                                        4,407     111,181
 Repayment of long-term debt                                       (17,195)    (26,748)
 Repayment of notes payable                                         (1,356)       (124)
 Payment of preferred stock dividends                                 (558)       (246)
 Net proceeds from issuance of Series C preferred stock             23,400          --
 Net proceeds from issuance of common stock and warrants             8,024       4,423
                                                                  --------   ---------
     Net cash provided by financing activities                      16,722      88,486
                                                                  --------   ---------
Effect of exchange rate changes on cash                                 36        (776)
                                                                  --------   ---------
Net increase in cash and cash equivalents                            7,273      54,469
Cash and cash equivalents, beginning of period                      11,325      40,656
                                                                  --------   ---------
Cash and cash equivalents, end of period                          $ 18,598   $  95,125
                                                                  ========   =========
Supplemental disclosure of cash flow information:
 Cash paid for interest during the period                         $  1,644   $   4,124
                                                                  ========   =========
Supplemental disclosure of noncash activities:
 Retirement of Class B 6% cumulative convertible preferred stock  $   (500)  $      --
                                                                  ========   =========
</TABLE>

See accompanying notes to condensed consolidated financial statements.


                                       5
<PAGE>   6

               INTEGRATED PROCESS EQUIPMENT CORP. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

BASIS OF PREPARATION:

         The accompanying condensed consolidated financial statements as of
March 31, 1998 and for the three month and nine month periods ended March 31,
1998 are unaudited; however, in the opinion of the management of Integrated
Process Equipment Corp. ("IPEC") and subsidiaries (the "Company"), such
statements include all adjustments (consisting solely of normal recurring
accruals) necessary for the fair statement of the information presented therein.
The condensed consolidated balance sheet as of June 30, 1997 was derived from
the audited financial statements at such date.

         Pursuant to accounting requirements of the Securities and Exchange
Commission applicable to quarterly reports on Form 10-Q, the accompanying
condensed consolidated financial statements and notes do not include all
disclosures required by generally accepted accounting principles for complete
financial statements. Accordingly, these statements should be read in
conjunction with the Company's annual financial statements and notes thereto
included in the Company's annual report on Form 10-K for the year ended June 30,
1997.

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

ORGANIZATION:

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

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


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

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Income (loss) per share of common stock:

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

         The following table reconciles the numerators and denominators of the
basic and diluted EPS computations from continuing operations and net income
attributable to common stockholders for the three and nine month periods ended
March 31, 1998 and 1997.


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

<TABLE>
<CAPTION>
                                                                      Three Months Ended     Nine Months Ended
                                                                           March 31,             March 31,
                                                                        1997       1998       1997       1998
                                                                      --------   --------   --------   --------
<S>                                                                   <C>        <C>        <C>        <C>     
BASIC EARNINGS (LOSS) FROM CONTINUING OPERATIONS PER COMMON SHARE:
     Net income (loss) from continuing operations                     $  2,128   ($ 2,465)  ($ 9,556)  $  7,177
     Cumulative dividend on preferred stock                                (61)       (61)      (223)      (183)
                                                                      --------   --------   --------   --------
         Net income (loss) from continuing operations
              attributable to common stockholders                     $  2,067   ($ 2,526)  ($ 9,779)  $  6,994
                                                                      ========   ========   ========   ========
         Weighted average number of
              shares outstanding                                        15,772     17,642     15,154     17,564
                                                                      ========   ========   ========   ========
         Basic earnings (loss) from continuing
              operations per share                                    $   0.13   ($  0.14)  ($  0.65)  $   0.40
                                                                      ========   ========   ========   ========
DILUTED EARNINGS (LOSS) FROM CONTINUING OPERATIONS PER COMMON SHARE:
     Net income (loss) from continuing operations attributable to     $  2,067   ($ 2,526)  ($ 9,779)  $  6,994
          common stockholders
     Add back:  Cumulative dividend on preferred stock                      61        N/A        N/A        183
                                                                      --------   --------   --------   --------
                                                                      $  2,128   ($ 2,526)  ($ 9,779)  $  7,177
                                                                      --------   --------   --------   --------
     Weighted average number of
          shares outstanding                                            15,772     17,642     15,154     17,564
     Add:  Shares of Series B Convertible
          Preferred Stock assuming conversion                              554        N/A        N/A        552
     Add:  Treasury stock adjustment                                     1,736        N/A        N/A      1,025
                                                                      --------   --------   --------   --------
     Weighted average number of shares
          used to compute diluted earnings
          (loss) per share                                              18,062     17,642     15,154     19,141
                                                                      ========   ========   ========   ========
     Diluted earnings (loss) per share                                $   0.12   ($  0.14)  ($  0.65)  $   0.37
                                                                      ========   ========   ========   ========
BASIC NET INCOME (LOSS) PER COMMON SHARE:
     Net income (loss) attributable
          to common stockholders                                      $  2,067   $ (2,526)  $(38,343)  $    330
                                                                      ========   ========   ========   ========
     Weighted average number of
          shares outstanding                                            15,772     17,642     15,154     17,564
                                                                      ========   ========   ========   ========
     Basic net income (loss)
          per common share                                            $   0.13   ($  0.14)  ($  2.53)  $   0.02
                                                                      ========   ========   ========   ========
DILUTED NET INCOME (LOSS) PER COMMON SHARE:
     Net income (loss)                                                $  2,067   ($ 2,526)  ($38,343)  $    330
     Add back: Cumulative dividend on preferred shares                      61        N/A        N/A        N/A
                                                                      --------   --------   --------   --------
     Net income (loss) used in computation                            $  2,128   ($ 2,526)  ($38,343)  $    330
                                                                      ========   ========   ========   ========
     Weighted average number of
          shares outstanding                                            15,772     17,642     15,154     17,564
     Add:  Shares of Series B Convertible
          Preferred Stock assuming conversion                              554        N/A        N/A        N/A
     Add:  Treasury stock adjustment                                     1,736        N/A        N/A        N/A
                                                                      --------   --------   --------   --------
     Weighted average number of shares
          used to compute diluted earnings
          (loss) per share                                              18,062     17,642     15,154     17,564
                                                                      ========   ========   ========   ========
     Diluted earnings (loss) per share                                $   0.12   ($  0.14)  ($  2.53)  $   0.02
                                                                      ========   ========   ========   ========
</TABLE>


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

INVENTORIES:

         Inventories are summarized as follows (in thousands):

<TABLE>
<CAPTION>
                                                      June 30, 1997 March 31, 1998
                                                      ------------- --------------
                                                                     (Unaudited)
<S>                                                   <C>             <C>     
Raw materials                                           $ 35,977       $ 51,868
Work in process                                           18,182         22,568
Finished goods                                             3,549          1,577
                                                        --------       --------
                                                          57,708         76,013
Less inventory obsolescence reserve                      (12,979)       (11,665)
                                                        --------       --------
                                                        $ 44,729       $ 64,348
                                                        ========       ========
</TABLE>

DISCONTINUED OPERATIONS:

         In the second quarter of fiscal 1997, the Company announced its
decision to focus its resources on the manufacturing of CMP and CMP-related
equipment. As a result of this decision, the Company adopted a plan for the
disposition by sale of IPEC Clean by December 31, 1997.

         IPEC Clean has been accounted for as a discontinued operation, and
accordingly its operations are segregated for all periods presented in the
accompanying statements of operations. Revenue, related losses and income tax
benefits associated with the discontinued operation for the nine month period
ended March 31, 1997 is as follows:

<TABLE>
<CAPTION>
                                                                    Nine Months Ended
                                                                     March 31, 1997
                                                                     --------------
                                                                (in thousands, unaudited)
<S>                                                             <C>    
Revenue                                                                 $ 4,609
                                                                        =======
Loss from operations before income taxes                                 (5,495)
Income tax benefit                                                       (1,881)
                                                                        -------
Net loss from discontinued operations                                   $(3,614)
                                                                        =======
</TABLE>

         The Company recorded a pre-tax charge in the three month period ending
December 31, 1996 amounting to $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. A charge of $3.0


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

million was also recorded to reflect the estimated phase out costs associated
with IPEC Clean. The tax benefit associated with these charges amounted to $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 three month period ended March 31,
1998 and is in the process of disposing of its assets. A pre-tax 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 the
three months ended December 31, 1997. The tax benefit associated with these
charges was $3.9 million.

         The net assets of the discontinued operation are summarized in the
accompanying condensed consolidated balance sheets at June 30, 1997 as follows:

<TABLE>
<CAPTION>
                                                                     June 30, 1997
                                                                     -------------
                                                                     (in thousands)
<S>                                                                  <C>    
Current assets                                                          $ 7,078
Current liabilities                                                      (4,615)
                                                                        -------
                                                                        $ 2,463
                                                                        =======
</TABLE>

LONG-TERM DEBT:

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

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


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

         The Company entered into a loan agreement in April 1996 with a bank.
Under the terms of the agreement, the Company received a $10.0 million term loan
and a $20.0 million revolving loan facility, since modified to $15.0 million, to
provide working capital for general corporate purposes. The loan agreement was
further modified to allow an increase of the revolving loan facility from $15.0
million to $20.0 million from the beginning of the last week of each fiscal
quarter through the end of the first week of the subsequent quarter. If the
Company is unable to qualify for the entire commitment amount under its
borrowing base, the Company may nonetheless borrow the amount for which it would
not otherwise qualify, by pledging with the bank dollar for dollar security in
the form of cash equivalents or marketable securities. The borrowing base for
the revolving loan facility consists of eighty percent of eligible accounts
receivable as defined by the agreement. At June 30, 1997, the eligible borrowing
base was $23.7 million, of which $20.0 million was borrowed. An additional $5.0
million was borrowed under the modification to the loan agreement and $5.0
million of cash equivalents were pledged as restricted cash collateral for this
borrowing. At March 31, 1998 there were no amounts outstanding under this loan
agreement.

         The facility bears interest at the Company's option at the prime rate
plus .25% or LIBOR plus 2.75%. The revolving loan facility was modified in April
1997 and extended until June 1998 with an option to renew the facility for a one
year period which the Bank must approve. If the revolving credit facility
expires, the Company is obligated to repay the outstanding balance in twelve
equal monthly payments of principal plus interest. The revolving loan facility
is secured by a first lien on all assets of the Company and its subsidiaries.
The $10 million term loan was repaid in the second quarter of fiscal 1997.

         The terms of the loan agreement include various covenants, which, among
other things, include maintenance of certain financial ratios, limit the amount
of dividends that can be paid to common stockholders and limit acquisitions of
treasury stock. The Company was in compliance with these covenants at June 30,
1997 and March 31, 1998.


                                       11
<PAGE>   12
                         PART I -- FINANCIAL INFORMATION

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

         The following information should be read in conjunction with the
condensed consolidated financial statements and notes thereto included in this
Quarterly Report and the audited Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations contained in the Company's Annual Report on Form 10-K for the year
ended June 30, 1997.

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 divisions. IPEC Planar
manufactures CMP equipment and CMP-related products for use primarily in
manufacturing of semiconductor devices. IPEC Precision manufactures advanced
plasma-assisted chemical etch systems and metrology equipment for use primarily
in manufacturing silicon wafers and semiconductor devices.

         IPEC incurred net losses of $2.5 million, $33.7 million and $10.7
million in the three months ended March 31, 1998, fiscal 1997 and fiscal 1996,
respectively, compared to net income of $599,000 in fiscal 1995. The Company's
loss in the three month period ended March 31, 1998 resulted from a reduction in
revenue due to the inability of certain customers in Asia to obtain satisfactory
financing terms and a downturn in the silicon wafer industry which limited sales
of wafer shaping equipment. The Company's fiscal 1997 net loss resulted from 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 development effort. The Company's
fiscal 1996 net loss resulted from a one-time pretax charge of $37.0 million for
in-process research and development in connection with the acquisitions of IPEC
Planar Portland and IPEC Precision. See "Factors Affecting Operating Results --
Operating Results Are Subject to Quarterly Fluctuations for Varied Reasons."

         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, material 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 gross margin for IPEC Precision's plasma-assisted chemical
etch


                                       12
<PAGE>   13
systems and metrology equipment could be lower than the gross margin for the
IPEC Planar's CMP tools. As new products are introduced by IPEC Precision in
future quarters, the Company's gross margin may decrease. See "Factors Affecting
Operating Results -- Operating Results Are Subject to Quarterly Fluctuations for
Varied Reasons."

         This report contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, which are subject to the
"safe harbor" created by that section. These forward-looking statements include,
but are not limited to, statements concerning future revenues, orders, operating
margins, expenses, cost-containment measures, disposal of IPEC Clean, and cash
needs. The Company's actual future results could differ materially from those
projected in the forward-looking statements. Some factors which could cause
future actual results to differ materially from the Company's recent results or
those projected in the forward-looking statements are described in "Factors
Affecting Operating Results" below. The Company assumes no obligation to update
the forward-looking statements or such factors.

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
                                                                         PERCENT OF TOTAL REVENUE
                                                                     --------------------------------
                                                                   THREE MONTHS ENDED NINE MONTHS ENDED
                                                                        MARCH 31,         MARCH 31,
                                                                     --------------    --------------
                                                                     1997     1998     1997     1998
                                                                     -----    -----    -----    -----
<S>                                                                  <C>      <C>      <C>      <C>   
Revenue                                                              100.0%   100.0%   100.0%   100.0%
Cost of goods sold                                                    54.6%    66.1%    58.5%    58.5%
                                                                     -----    -----    -----    -----
       Gross margin                                                   45.4%    33.9%    41.5%    41.5%
                                                                     -----    -----    -----    -----
Operating expenses:
    Research and development                                          15.1%    21.1%    17.2%    15.8%
    Selling, general and administrative                               21.0%    21.1%    20.5%    17.5%
     Program discontinuance charge                                      --       --     17.2%      --
                                                                     -----    -----    -----    -----
       Total operating expenses                                       36.1%    42.2%    54.9%    33.3%
                                                                     -----    -----    -----    -----
       Operating income (loss)                                         9.3%    (8.3%)  (13.4%)    8.2%
Other income (expense):
    Interest income                                                     .5%     3.5%      .4%     2.2%
    Interest expense                                                   (.6%)   (4.7%)   (1.4%)   (2.9%)
    Other, net                                                          --       --       .3%      --
                                                                     -----    -----    -----    -----
       Total other income (expense)                                    (.1%)   (1.2%)    (.7%)    (.7%)
                                                                     -----    -----    -----    -----
       Income (loss) from continuing operations before income taxes    9.2%    (9.5%)  (14.1%)    7.5%
Income tax expense (benefit)                                           3.5%    (3.5%)   (4.7%)    2.8%
                                                                     -----    -----    -----    -----
       Income (loss) from continuing operations                        5.7%    (6.0%)   (9.4%)    4.7%
 Discontinued operations:
     Loss from operations of IPEC Clean, net of taxes                   --       --     (3.5%)     --
     Loss on  disposal of IPEC Clean, net of taxes                      --       --    (24.4%)   (4.4%)
                                                                     -----    -----    -----    -----
       Net (loss) from discontinued operations                          --       --    (27.9%)   (4.4%)
                                                                     -----    -----    -----    -----
       Net income (loss)                                               5.7%    (6.0%)  (37.3%)     .3%
                                                                     =====    =====    =====    =====
</TABLE>


                                       13
<PAGE>   14
QUARTER ENDED MARCH 31, 1998 COMPARED TO QUARTER ENDED MARCH 31, 1997

         Revenue. Revenue was $41.3 million for the quarter ended March 31, 1998
compared to $37.0 million for the quarter ended March 31, 1997. The 12% growth
in revenue has resulted primarily from the sale of the Company's high throughput
systems, the AvantGaard 676 and 776, which have higher average selling prices
than the older Avanti 372M and 472 systems. Additionally, in the quarter ended
March 31, 1997 the Company was beginning to recover from an industrywide
slowdown in semiconductor shipments in the first half of fiscal 1997. Revenue
for the quarter ended March 31, 1998 was 29% lower than the previous record
level quarter ended December 31, 1997. This resulted from a reduction in
revenues from Asia, particularly Korea, where customers have been unable to
arrange for satisfactory financing terms and a downturn in the silicon wafer
industry, which limited sales of wafer shaping equipment. The Company
anticipates lower revenue levels in the fourth quarter of fiscal 1998 compared
to the quarter ended December 31, 1997 as a result of these economic conditions.
Revenue from international sales represented 51% and 35% of total revenues for
the quarters ended March 31, 1998 and 1997, respectively.

         Cost of goods sold. Cost of goods sold increased as a percentage of
revenue to 66.1% for the quarter ended March 31, 1998 from 54.6% for the quarter
ended March 31, 1997. This resulted from several factors. First, an increase of
international sales to distributors occurred in the quarter ended March 31, 1998
compared to the quarter ended March 31, 1997. This resulted in higher sales
discounts and lower gross margins. Second, increased fixed manufacturing and
field service expenses were incurred to build, support and service new products.
Third, increased expenses for product installation and process acceptance were
encountered for the Company's AvantGaard 676 and 776 products in the quarter
ended March 31, 1998. Because revenues are not expected to return to second
quarter 1998 levels until industry conditions improve, cost of goods sold as a
percentage of revenue is expected to remain high, adversely affecting gross
margins.

         Research and development. Research and development expense increased
56% to $8.7 million for the quarter ended March 31, 1998 from $5.6 million for
the quarter ended March 31, 1997. Expenditures are being incurred to further
develop the AvantGaard 676 and the AvantGaard 776 which includes an integrated
cleaner. Additional efforts are continuing to develop a 300 mm integrated CMP
system (the AvantGaard 876), plasma-assisted chemical etch systems, metrology
technologies, copper, and dual damascene CMP processes. The Company believes
these projects are critical to future success in the CMP marketplace and intends
to continue these programs through the Asian economic slowdown.

         Selling, general and administrative. Selling, general and
administrative expenses increased 12% to $8.7 million for the quarter ended
March 31, 1998 from $7.8 million for the quarter ended March 31, 1997. The
increase has resulted primarily from a higher level of sales activity and an
expanded international presence when compared to the quarter ended March 31,
1997. A $.4 million charge was incurred for costs in connection with a withdrawn
equity offering during the quarter ended March 31, 1997. Selling, general and
administrative expense as a percentage of total revenue remained constant at 21%
for the quarters ended March 31, 1998 and 1997. Due to current conditions in the
semiconductor industry, particularly in Asia, the Company initiated
cost-containment measures in the fourth quarter of


                                       14
<PAGE>   15
fiscal 1998, including salary cuts among senior management, mandatory vacations
and certain project cost reductions. These cost-containment measures are not
expected to significantly improve operating results during fiscal 1998.

         Interest income and interest expense. Interest income increased to $1.5
million for the quarter ended March 31, 1998 from $.2 million for the quarter
ended March 31, 1997. Interest expense increased to $1.9 million for the quarter
ended March 31, 1998 from $.2 million for the quarter ended March 31, 1997.
Higher amounts of interest income and expense 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 benefit for the quarter ended March 31,
1998 was $1.4 million compared to a tax expense of $1.3 million for the quarter
ended March 31, 1997. The effective tax expense (benefit) rates were (37%) and
38% for the quarters ended March 31, 1998 and 1997, respectively. Differences in
the effective tax rates result primarily from a lower anticipated Federal income
tax rate due to increased research and development tax credits.

NINE MONTHS ENDED MARCH 31, 1998 COMPARED TO NINE MONTHS ENDED MARCH 31, 1997

         Revenue. Revenue was $150.5 million for the nine months ended March 31,
1998 compared to $102.1 million for the nine months ended March 31, 1997. The
47% increase in revenue has resulted primarily from two factors. First, the
Company has sold more of its high throughput systems, the AvantGaard 676 and
776, which have higher average selling prices than the older Avanti 372M and 472
systems. Second, there was an industrywide slowdown in semiconductor equipment
shipments in the first half of fiscal 1997. Revenue from international sales
represented 43% and 36% of total revenue for the nine months ended March 31,
1998 and 1997, respectively. The Company expects that revenue for the quarter
ended June 30, 1998 will be below revenue levels that were attained in each of
the first two quarters of fiscal 1998.

         Cost of goods sold. Cost of goods sold as a percentage of revenue was
58.5% for both the nine month periods ended March 31, 1998 and 1997. Increased
foreign sales to distributors and higher costs of installation, primarily for
AvantGaard 676 and 776 products in the quarter ended March 31, 1998, adversely
affected gross profit margins. Additional costs were incurred in the nine months
ended March 31, 1997 as a result of costs associated with repositioning of the
Avanti 672 for wafer polishing in the first quarter of fiscal 1997 and the
allocation of certain fixed costs across lower revenue. A $1.1 million increase
in cost of goods sold in the nine months ended March 31, 1997 also resulted from
the acceleration of certain orders into the first three quarters of fiscal 1997.

         Research and development. Research and development expense increased
35% to $23.8 million for the nine months ended March 31, 1998 from $17.5 million
for the nine months ended March 31, 1997. Expenditures were incurred to further
develop the AvantGaard 676 and the AvantGaard 776 which includes an integrated
cleaner. Research and development expense for the nine months ended March 31,
1997 included expenditures for the development of the Avanti 672 CMP tool
through December 31, 1996. This program was discontinued in the second quarter
of fiscal 1997.


                                       15
<PAGE>   16
         Selling, general and administrative. Selling, general and
administrative expense increased 26% to $26.3 million for the nine months ended
March 31, 1998 from $20.9 million for the nine months ended March 31, 1997. The
$5.4 million increase resulted primarily from a higher level of sales activity
and an increased international presence in the nine months ended March 31, 1998
compared to March 31, 1997. Additionally, for the nine months ended March 31,
1997, selling, general and administrative expenses were offset by a $.9 million
benefit resulting from adjustments for both the acquisitions of Westech Systems,
Inc. and GAARD Automation, Inc.

         Program discontinuance charge. In the quarter ended December 31, 1996,
the Company demonstrated that the AvantGaard 676 tool could be used for oxide
planarization as well as metal planarization. As a result, the Company decided
to discontinue the development of the Avanti 672, an integrated 300mm
high-volume oxide CMP tool. Accordingly, the Company incurred a $17.6 million
program discontinuance charge in the quarter ended December 31, 1996 from write
downs of inventory and assets relating to the Avanti 672 program.

         Interest income and interest expense. Interest income increased to $3.2
million for the nine months ended March 31, 1998 from $.4 million for the nine
months ended March 31, 1997. Interest expense increased to $4.4 million for the
nine months ended March 31, 1998 from $1.4 million for the nine months ended
March 31, 1997. Higher amounts of interest income and expense 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 for the nine months ended March
31, 1998 was $4.2 million compared to a tax benefit of $4.8 million for the nine
months ended March 31, 1997. The effective tax (benefit) rates were 37% and
(34%) for the nine months ended March 31, 1998 and 1997, respectively.
Differences in the effective tax rates result primarily from adjustments for
deferred taxes and state taxes.

         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 for the nine months
ended March 31, 1997 amounted 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, net of taxes, of $6.7 million in the quarter ended December 31,
1997. The Company has closed IPEC Clean and is now in the process of liquidating
its assets.

LIQUIDITY AND CAPITAL RESOURCES

         The Company's principal sources of liquidity include cash and cash
equivalents of $95.1 million as of March 31, 1998, an increase of $54.5 million
from June 30, 1997. The increase in cash and cash equivalents during the nine
months ended March 31, 1998 resulted from the private placement of $115.0
million of 6.25% Convertible Subordinated 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.


                                       16
<PAGE>   17
         Proceeds from the Notes were utilized to repay the balance of the
Company's revolving line of credit. Remaining portions of proceeds may be used
to expand the Company's sales and service operations in Asia, to expand IPEC
Precision's facilities and for general corporate purposes including working
capital and research and development. Pending such uses, the Company has
invested net proceeds in interest bearing investment grade securities.

         As of March 31, 1998, the Company had $190.8 million of working capital
compared to $99.1 million as of June 30, 1997. The Company's accounts receivable
increased to $58.4 million as of March 31, 1998 compared to $45.6 million at
June 30, 1997. The increase in accounts receivable was primarily due to a higher
level of sales activity to date in fiscal 1998 compared to the fourth quarter of
fiscal 1997, favorable credit terms granted to certain international customers
and to customers purchasing initial AvantGaard 676 and 776 systems. The
Company's inventory increased to $64.3 million as of March 31, 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, increased levels of
manufacturing at IPEC Precision and lower revenues in the quarter ended March
31, 1998 resulting from an economic slowdown in Asia.

         The Company's property, plant and equipment increased $10.1 million to
$35.6 million as of March 31, 1998 from $25.5 million as of June 30, 1997,
primarily due to additions of testing and demonstration equipment related to the
AvantGaard 676, 776, and 876 systems.

         Total long-term debt increased to $119.2 million as of March 31, 1998
from $30.1 million as of June 30, 1997 as a result of the issuance of $115.0
million of Convertible Subordinated Notes described above. Total long-term debt
as a percentage of stockholders' equity increased to 87% as of March 31, 1998
from 23% as of June 30, 1997. The Company also has $15.0 million available under
a revolving loan facility with a bank. As of March 31, 1998 there were no
amounts outstanding under this facility.

         The Company believes that its cash and cash equivalents will be
sufficient to fund its operations for the foreseeable future. The Company's cash
needs depend on, among other things, whether its sales continue to expand, which
would require greater investments in working capital, and on 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.

FACTORS AFFECTING OPERATING RESULTS

         The Company's Limited Operating History Has Involved 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 in fiscal 1996, 1997, the three months ended December 31, 1997 and the
three months ended March 31, 1998 of $10.7 million, $33.7 million, $1.7 million
and $2.5


                                       17
<PAGE>   18
million, respectively. Operating results in fiscal 1997 include 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. Operating
results for the three months ended December 31, 1997 include a charge of $6.7
million (net of taxes) for the remaining unsold net assets of IPEC Clean.
Operating results for the three months ended March 31, 1998 were adversely
affected by reduced revenues due to the inability of certain customers in Asia
to obtain satisfactory financing and a downturn in the silicon wafer industry
which limited sales of wafer shaping equipment. Operating results for future
periods are subject to numerous uncertainties, and there can be no assurance
that the Company will be profitable in future periods.

         Operating Results Are Subject to Quarterly Fluctuations for Varied
Reasons. The Company's operating results are subject to quarterly fluctuations
due to a variety of factors, including industry-wide changes in the demand for
semiconductors or for semiconductor production equipment generally and, in
particular, for high performance semiconductors with smaller line widths and
multiple layers; 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; the level of
international sales, which historically have had lower margins than domestic
sales; delayed or canceled construction of wafer fabrication facilities by
customers; research and development expenses associated with new product
introductions; 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 cannot assure that it will be able to anticipate or
respond timely to changes in any of the factors listed above.

         The Company has experienced adverse effects from some of these factors
in the past and may experience them in the future. In the second quarter of
fiscal 1996, the Company incurred net losses due to one-time charges associated
with the IPEC Planar Portland and IPEC Precision acquisitions. The Company
incurred a 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 as described below. 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 on 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 $6.7 million charge (net of taxes) for the
remaining unsold net assets of IPEC Clean. The semiconductor equipment market
experienced an industry-wide slowdown in the second half of calendar 1996, which
adversely affected sales of the Company's CMP polishing equipment. 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 below fiscal 1996 revenue. The current
economic conditions in Asia have resulted in the inability of several Korean
customers to obtain satisfactory financing terms to enable them to place


                                       18
<PAGE>   19
orders in the third quarter of fiscal 1998 and the Company believes these
customers will be unable to place orders in the fourth quarter of fiscal 1998.
The Company incurred losses in the third quarter of fiscal 1998 as a result of
this decrease in anticipated orders and anticipates lower revenues in the fourth
quarter of fiscal 1998 compared to the quarter ended December 31, 1997. Gross
margins in the fourth quarter of fiscal 1998 are not expected to improve
significantly over third quarter levels due to the distribution of fixed costs
over a smaller revenue base. While the Company has initiated cost-containment
measures, the measures are not expected to significantly improve operating
results in fiscal 1998. Accordingly, the Company may experience losses until
industry conditions improve.

         Results of operations in any period should not be considered indicative
of the results to be expected for future periods. 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 Impact Quarterly
Results. The Company derives most of its revenue from the sale of products in a
price range from $250,000 to $2.5 million per unit, and clustered systems can be
priced much higher. 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 previously experienced order and delivery delays and
cancellations which caused the Company to miss its quarterly revenue and profit
projections, including during the first quarter of fiscal 1997, and there can be
no assurance that the Company can avoid such order and delivery delays in the
future. During the first quarter of fiscal 1997, a significant customer agreed
to accelerate 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 which the Company has included in its
backlog may be cancelled. For example, the Company removed from its backlog
orders of approximately $12.0 million in the fourth quarter of fiscal 1997,
primarily due to delays in construction of a wafer fabrication facility for
Submicron Systems in Thailand. Orders may be delayed or cancelled due to
economic conditions in Asia or other reasons. A significant portion of the
Company's operating expenses are relatively fixed in nature and planned
expenditures are based in part on anticipated orders. Ongoing expenditures for
product development and engineering make it difficult to reduce expenses in a
particular quarter if the Company's sales goals 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. See "MD&A -- Results of Operations."

         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 1997, Intel represented 51% of the Company's revenue. In
fiscal 1996, Intel and IBM represented 35% and 11%, respectively, of the
Company's revenue. In fiscal 1995, Intel, IBM and Motorola represented 16%, 24%
and 16%, respectively, of the Company's revenue. The Company anticipates that
its revenue will continue to depend on a limited number of major customers,
although the companies considered to be major customers and the percentage of
the Company's revenue represented by each major customer may vary from quarter
to quarter. Several of the Company's major customers, including Intel, must


                                       19
<PAGE>   20
determine shortly the extent to which 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. The loss of a major
customer, any material reduction in orders by such customers, including
reductions due to market or competitive conditions or the determination of any
such 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 depends in part upon its
ability to obtain orders from new customers, as well as the financial condition
of its customers and the general economy.

         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. IPEC defines semiconductor
manufacturers using CMP in volume production as companies using ten or more CMP
systems. Most semiconductor manufacturers who have CMP equipment use it only for
pilot line production or research and development and 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. While 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. There can be no assurance that
projected industry growth will occur or that additional semiconductor
manufacturers will adopt CMP processes for volume production. Lack of growth in
the semiconductor industry and the determination of such manufacturers not to
adopt CMP processes for volume production would have a material adverse effect
on the Company's business, financial condition and results of operations.

         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 calendar 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 its reliance on sales of the
AvantGaard 676 and AvantGaard 776 to increase 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 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, and the Company believes that the oxide processes
are being used in production by a very limited number of customers. The
AvantGaard 776 was designed to integrate CMP, metrology and wafer cleaning in a
single unit with both oxide and metal capability. If commercial use does not
confirm the utility of the AvantGaard 676 and AvantGaard 776 for both oxide and
metal processes, or if customers do not broadly adopt the AvantGaard 676 and
AvantGaard 776, the Company's business, financial condition and results of
operations would be materially and adversely affected.

         The Company's future results also depend 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. There can be no


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<PAGE>   21
assurance that customers will accept these products or that these products can
be sold profitably or in volume.

         The Company Must Develop New Products Due to Technological Change. The
Company derives most of its revenue from sales of CMP equipment and related
products by IPEC Planar. Semiconductor manufacturing equipment and processes are
subject to rapid technological changes and product obsolescence. Sales of
certain of the Company's products generally depend on new semiconductor
fabrication facility construction projects and facility upgrades by customers.
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. 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.

         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 systems, plasma-assisted chemical
etch systems, metrology technologies, 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 the plasma-assisted chemical etch
system. The Company cannot assure that any product in development will be
completed as scheduled or that completed products or processes will be
commercially adopted. Due to the complexity and sophistication of the Company's
products and related automation software, the Company's products from time to
time may contain defects or "bugs" which can be difficult to correct.
Furthermore, as the Company continues to develop and enhance its products, there
can be no assurance that the Company will 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 currently under development are not
commercialized in a timely manner, the Company could be required to write off
inventory and other assets related to the development project, 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 May be Adversely Affected by the Intensely Competitive
Market in Which it Participates. The semiconductor equipment industry is an
intensely competitive market. 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. The Company is aware
of a number of companies currently marketing CMP systems that directly compete
with the Company's systems, including Applied Materials, Inc. ("Applied
Materials"), Ebara Corporation, SpeedFam International, Inc. and Strasbaugh.
Competition is increasing significantly in the market for high-throughput
planarization systems. The Company is aware that other capital equipment
manufacturers not currently involved in the development of CMP systems may also
attempt to enter and develop


                                       21
<PAGE>   22
products for this market or to develop alternative technologies which may reduce
the need for the Company's products. For example, Lam Research Corporation, a
semiconductor production equipment supplier, acquired OnTrak Systems, Inc., a
manufacturer of wafer processing equipment which has developed a CMP tool. The
Company anticipates that its customers will be increasingly inclined to utilize
multiple CMP suppliers. Therefore, successful process qualification of the
Company's CMP systems may not lead to exclusive source supplier relationships
with its customers in the future. The Company also believes that other companies
are developing or marketing products which compete with the Company's
plasma-assisted chemical etch systems and metrology equipment and that such
competition may increase in the future.

         The trend toward consolidation in the semiconductor equipment industry
has made it increasingly important to have the financial resources necessary to
compete effectively across 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 current and potential competitors,
including Applied Materials, provide customers with evaluation tools and have
substantially greater financial resources and name recognition than the Company.
In addition, current and potential 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 loss of market
acceptance of the Company's existing products and could adversely affect the
acceptance of new products. Moreover, increased competitive pressure could lead
to intensified price based competition, which could have a material adverse
effect on the Company's business, financial condition and results of operations.

         The Company is Subject to Risks Associated with International Sales.
International sales accounted for approximately 51% of the Company's revenue for
the quarter ended March 31, 1998. International sales accounted for
approximately 27% and 28% of the Company's revenue in fiscal 1997 and 1996,
respectively. The Company's international sales historically have had lower
gross margins than domestic sales since these sales have been made through
distributors, which purchase products from the Company at a discount to list
price. The Company expects that international sales will continue to account for
a significant portion of its revenue in future periods. Margins on international
sales may vary in the future depending on the level of sales made through
distributors. International sales are subject to certain inherent risks,
including tariffs, embargoes and other trade barriers, staffing and operating
foreign sales and service operations, managing distributors and collecting
accounts receivable. The Company is also subject to risks associated with
regulations relating to the import and export of high technology products. The
export of the Company's products to certain countries is limited by law. 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. While
the Company's sales are currently denominated only in U.S. dollars,


                                       22
<PAGE>   23
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.

         The Company's Strategy Relies on Increased Penetration of the Asian
Market. The Company believes that its future success will depend in part upon
continued acceptance of its products by Asian semiconductor manufacturers. This
market segment is large, represents a substantial percentage of the worldwide
semiconductor manufacturing capacity, and is difficult for foreign companies to
penetrate. The current economic conditions in Asia have resulted in the
inability of several Korean customers to obtain satisfactory financing terms to
enable them to place orders in the third quarter of fiscal 1998 and the Company
believes these customers will be unable to place orders in the fourth quarter of
fiscal 1998. There is no assurance that such conditions will improve.
Furthermore, Asian 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 currently sells its products in Asia through
sales representatives and distributors. The Company is establishing a
fully-staffed Asia Pacific division to service this market. A direct presence in
these markets, particularly Japan, requires the allocation of substantial
management and financial resources, may adversely affect the Company's
relationship with its current distributors, and may increase a number of risks
related to international sales as described above.

         The Semiconductor Industry Is Cyclical, Causing Fluctuations in the
Company's Operating Results. The Company's business depends upon capital
expenditures by manufacturers of semiconductor devices, primarily for the
opening of new or expansion of existing fabrication facilities which, in turn,
depends upon the 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. The
cyclicality of the semiconductor industry has had a severe adverse effect on the
industry's demand for semiconductor processing equipment. In certain instances,
industry downturns have lasted for extended periods of time. Because the Company
believes that it must maintain research and development and customer service and
support expenditures even during industry downturns, any downturn in the
semiconductor industry could have a material adverse effect on the Company's
business, financial condition and results of operations. There can be no
assurance that past growth in the semiconductor and semiconductor capital
equipment industries, or the resulting growth in the Company's business, can be
sustained in the future or that the downturns in the market will not reoccur.

         The Company's planned operations assume that a significant portion of
new orders will result from demand from semiconductor manufacturers building,
expanding, or retrofitting fabrication facilities for advanced multi-level
semiconductor devices with design requirements of 0.35 micron and below, and
there can be no assurance that such demand will exist.

         Past Acquisitions Have Adversely Affected Operating Results. The
Company's growth in annual revenues from fiscal 1994 through fiscal 1996 has
resulted not only from expansion of its core CMP business, but also from
acquisitions in fiscal 1994 and 1996. The Company's expansion through
acquisitions has resulted in significantly higher operating expenses,
particularly because the Company's strategy initially has been to operate each
acquired business independently, resulting in separate


                                       23
<PAGE>   24
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, has never operated profitably, was discontinued
by the Company in the second quarter of fiscal 1997 and closed in the third
quarter of fiscal 1998, resulting in a $25.0 million charge (net of taxes) in
the second quarter of fiscal 1997 and a $6.7 million charge in the second
quarter of fiscal 1998. IPEC Precision has only recently achieved significant
revenue from shipments of production equipment. There can be no assurance that
the Company will be able to integrate or operate profitably any acquired entity.

         IPEC Precision Joint Development Program May Require Significant
Resources and Adversely Affect Results. The Company has entered into an
agreement with MEMC to develop a family of wafer shaping tools using IPEC
Precision's plasma-based planarization and metrology technology. IPEC Precision
and MEMC have established an LLC which will own the intellectual property
developed and license it to IPEC Precision. IPEC Precision will share expenses
related to the joint development program and pay royalties to the LLC on the
sale of newly developed plasma wafer shaping tools. There can be no assurance
that the joint development program will be successful. IPEC Precision's products
have only been sold to a limited number of customers and have not been widely
accepted by silicon wafer manufacturers.

         Disposition of IPEC Clean May Require Significant Resources and
Adversely Affect Results. The Company may dispose of or spin off portions of its
business which the Company determines are not complementary to its strategy. The
Company closed IPEC Clean's operations in the third quarter of fiscal 1998 and
is currently disposing of its assets. Such disposition efforts could absorb
significant management time and adversely affect the Company's business,
financial condition and results of operations.

         Future Acquisitions May Require Significant Resources and Adversely
Affect Results. The Company's strategy is to obtain additional wafer fabrication
technologies and may involve, in part, acquisitions of products, technologies or
businesses from third parties. The Company also may make acquisitions for other
reasons, including to obtain additional distribution capacity in specified
geographic markets. An acquisition could absorb substantial cash resources,
require the Company to incur or assume debt obligations, or involve the issuance
of additional 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 goodwill over a number of years, which would
adversely affect earnings in those years. An acquired entity may have unknown
liabilities, and its business may not achieve the results anticipated at the
time of the acquisition. An acquisition or disposition would absorb significant
management time and could have a material adverse effect on the Company's
business, financial condition and results of operations.

         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 use in the Company's products. In the event that 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 business, financial condition and
results of operations would be materially adversely affected. In


                                       24
<PAGE>   25
addition, the Company purchases certain key components from qualified vendors
for which alternative qualified sources are not currently available. Any
prolonged inability to obtain adequate amounts of qualified components would
have a material adverse effect on the Company's business, financial condition
and results of operations.

         The Company Depends on its Key Personnel. The Company's future 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 1996, October 1996 and April 1998, the Company effected
reductions in its work force 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 terminations 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 in significant part on the proprietary
nature of its 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 do 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. As is the case with high
technology companies generally, the Company may from time to time receive notice
of claims of infringement of other parties' proprietary rights. If any Company
equipment is found to infringe a patent, a court may grant an injunction to
prevent making, selling or using the equipment 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


                                       25
<PAGE>   26
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 nature of the Company's business exposes it to product
liability claims, as well as the risk that harmful substances will escape into
the workplace and 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. The
Company had at March 31, 1998 approximately 224,000 shares of Class A Common
Stock outstanding, which has four votes for each share. The majority of the
Class A Common Stock is beneficially owned by Sanjeev R. Chitre, the Chairman of
the Board of Directors, and a trust for the benefit of his daughter. The voting
power held by the Company's officers and directors may give those individuals
substantial influence over any corporate action submitted to the Company's
stockholders for vote. The Company designated 50,000 shares of Series D
Preferred Stock in connection with a stockholder rights plan adopted in May
1997. The Company's Certificate of Incorporation authorizes the Company's Board
of Directors to issue additional Preferred Stock in one or more series and to
fix the rights, preferences, privileges and restrictions granted to or imposed
upon any wholly unissued shares of preferred stock and to fix the number of
shares constituting any series and the designation of such series, 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 which 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 is subject
to Section 203 of the Delaware General Corporation Law, which restricts certain
business combinations with any "interested stockholder" as defined by that
statute. This statute and the stockholder rights plan are designed to encourage
potential acquirors to negotiate with the Company's Board of Directors. The
voting power held by officers and directors, outstanding rights to elect members
of the Company's Board of Directors, the Company's stockholder rights plan, the
voting rights of outstanding Preferred Stock and Preferred Stock which may be
issued in the future, the existence of Class A Common Stock and the application
of Delaware General Corporation Law Section 203 could discourage certain types
of transactions involving an actual or potential change in control of the
Company, including transactions in which the holders of Common Stock who are not
officers and directors might otherwise receive a premium for their shares over
then current prices, and may limit the ability of such stockholders to cause or
approve transactions which they may deem to be in their best interests.

         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 Common Stock may be significantly affected by factors such
as quarter to quarter variations in the actual or anticipated


                                       26
<PAGE>   27
financial results of the Company or of other companies in the semiconductor
industry, or in the markets served by the Company, announcements by the Company
or its competitors regarding new product introductions, changes in financial
estimates by securities analysts, general market conditions, and other factors.
In addition, the stock market has experienced extreme price and volume
fluctuations that have particularly affected the market price for many high
technology companies and that have often been unrelated to the operating
performance of these companies. The market price of the Company's Common Stock
has fluctuated substantially in recent periods. These broad market fluctuations
may adversely affect the market price of the Common Stock, and there can be no
assurance that the market price of the Common Stock will not decline below
current levels. In the past, following periods of volatility in the market price
of a particular 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 and cash equivalents are sufficient to support its
operation through the forseeable future. Additional new debt or equity financing
may be required to fund the Company's growth. There can be no assurance that
such additional financing will be available when needed or, if available, will
be on satisfactory terms. In order to raise capital, the Company may issue debt
or equity securities senior to the outstanding Common Stock, and may incur
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. In the next two years,
most large companies will face potentially serious information systems and
computer problems because most software application and operational programs
written in the past will not properly recognize calendar dates beginning in the
year 2000. This could force 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. The Company is unable to predict the costs to be incurred for
correction of such noncentralized systems, but expects the scope and schedule
for such work to be less complex than for its centralized systems. The Company
believes that Year 2000 problems will not have a material adverse effect on the
Company's business, financial conditions and results of operations.


                                       27
<PAGE>   28
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

         (a)      Exhibits - None.

         (b)      Reports on Form 8-K

                  A report on Form 8-K was filed on January 27, 1998 reporting
                  (under Item 5) earnings for the quarter ended December 31,
                  1997.


                                       28
<PAGE>   29
SIGNATURES

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

Date: May 12, 1998                           INTEGRATED PROCESS EQUIPMENT CORP.
                                                      AND SUBSIDIARIES

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


                                       29