<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, 1997

                                       OR

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

For the transition period from ______________________ to ______________________

Commission file number 0-20470

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

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

 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 9, 1997, 456,650 shares of Class A Common Stock and
16,549,769 shares of Common Stock of the registrant were outstanding.


                                  Page 1 of 31

<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                                                                                               1996             1997
                                                                                                   ---------        ---------
                                                                                                                   (Unaudited)
<S>                                                                                                <C>              <C>
Current assets:
    Cash and cash equivalents                                                                      $  11,325        $  18,598
    Accounts receivable                                                                               34,089           49,883
    Inventories                                                                                       23,437           34,959
    Prepaid expenses                                                                                     946            1,213
    Deferred income taxes                                                                              5,175           13,646
    Net assets of discontinued operations                                                             29,719            3,933
                                                                                                   ---------        ---------
            Total current assets                                                                     104,691          122,232
                                                                                                   ---------        ---------

Property, plant and equipment, net                                                                    50,225           24,801
Intangible assets, net                                                                                15,135           12,453
Deferred income taxes                                                                                 13,175           17,880
Other assets                                                                                           1,475            1,564
                                                                                                   ---------        ---------

                                                                                                   $ 184,701        $ 178,930
                                                                                                   =========        =========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
    Notes payable                                                                                  $   2,056        $     124
    Current portion of long-term debt                                                                  1,886            2,284
    Accounts payable                                                                                  11,961           13,943
    Accrued liabilities                                                                               17,708           26,982
                                                                                                   ---------        ---------
            Total current liabilities                                                                 33,611           43,333

Long-term debt, less current portion                                                                  22,753           11,905
                                                                                                   ---------        ---------
            Total liabilities                                                                         56,364           55,238
                                                                                                   ---------        ---------

Stockholders' equity:
Preferred stock, $ .01 par value per share. Nonvoting, authorized 2,000,000 shares:
    Series B-1 cumulative preferred stock.  Authorized 21,478 shares, issued and outstanding
      20,941 shares at June 30, 1996 and 14,543 shares at March 31, 1997.  Liquidation
        preference of $1,354.                                                                             --               --
    Series B-2 cumulative preferred stock.  Authorized 21,478 shares, issued and outstanding
      20,941 shares at June 30, 1996 and 19,544 shares at March 31, 1997.  Liquidation
        preference of $1,820.                                                                             --               --
    Series B-3 cumulative preferred stock.  Authorized 21,478 shares, issued and outstanding
      21,210 shares at June 30, 1996 and 9,898 shares at March 31, 1997.  Liquidation
        preference of $922.                                                                               --               --
Common stock, $.01 par value per share.  Authorized 50,000,000 shares; one vote per share;
    issued and outstanding 14,238,406 shares at June 30, 1996 and 16,486,070 shares at
        March 31, 1997.                                                                                  142              164
Class A common stock, $.01 par value per share.  Authorized 3,500,000 shares, four votes per
    share; issued and outstanding 521,650 shares at June 30, 1996 and 456,650 shares at
        March 31, 1997.                                                                                    5                5
Additional paid-in capital                                                                           151,730          185,705
Accumulated deficit                                                                                  (23,546)         (62,224)
Foreign currency translation adjustment                                                                    6               42
                                                                                                   ---------        ---------
            Total stockholders' equity                                                               128,337          123,692
                                                                                                   ---------        ---------
                                                                                                   $ 184,701        $ 178,930
                                                                                                   =========        =========
</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,
                                                                       -----------------------     -----------------------
                                                                         1996          1997          1996          1997
                                                                       ---------     ---------     ---------     ---------
<S>                                                                    <C>           <C>           <C>           <C>      
Revenue                                                                $  39,864     $  37,019     $ 106,838     $ 102,088
Cost of goods sold                                                        23,217        20,202        60,501        59,725
                                                                       ---------     ---------     ---------     ---------
            Gross margin                                                  16,647        16,817        46,337        42,363
                                                                       ---------     ---------     ---------     ---------

Operating expenses:
    Research and development                                               4,589         5,586        10,915        17,536
    Purchased research and development                                        --            --        36,961            --
    Selling, general and administrative                                    8,193         7,761        19,402        20,878
    Program discontinuance charge                                             --            --            --        17,601
                                                                       ---------     ---------     ---------     ---------
            Total operating expenses                                      12,782        13,347        67,278        56,015
                                                                       ---------     ---------     ---------     ---------

            Operating income (loss)                                        3,865         3,470       (20,941)      (13,652)

Other income (expense):
    Interest income                                                          371           203         1,526           406
    Interest expense                                                      (1,117)         (237)       (1,362)       (1,410)
    Other, net                                                               182            (3)          363           256
                                                                       ---------     ---------     ---------     ---------
            Total other income (expense)                                    (564)          (37)          527          (748)
                                                                       ---------     ---------     ---------     ---------

            Income (loss) from continuing operations before
              income taxes                                                 3,301         3,433       (20,414)      (14,400)
Income tax expense (benefit)                                               1,181         1,305        (8,267)       (4,844)
                                                                       ---------     ---------     ---------     ---------

            Net income (loss) from continuing operations                   2,120         2,128       (12,147)       (9,556)

Discontinued operations:
    Income (loss) from operations of IPEC Clean, Inc., net of taxes          576            --          (591)       (3,614)
    Loss on disposal of IPEC Clean, Inc., net of taxes                        --            --            --       (24,950)
                                                                       ---------     ---------     ---------     ---------

            Net income (loss) from discontinued operations                   576            --          (591)      (28,564)
                                                                       ---------     ---------     ---------     ---------

            Net income (loss)                                              2,696         2,128       (12,738)      (38,120)

Cumulative dividend on preferred stock                                       (90)          (61)         (489)         (223)
                                                                       ---------     ---------     ---------     ---------

            Net income (loss) attributable to common stockholders      $   2,606     $   2,067     $ (13,227)    $ (38,343)
                                                                       =========     =========     =========     =========


Income (loss) per common share:
    From continuing operations                                         $     .13     $     .11     $    (.88)    $    (.65)
    From discontinued operations                                             .04            --          (.04)        (1.88)
                                                                       ---------     ---------     ---------     ---------
Income (loss) per common share                                         $     .17     $     .11     $    (.92)    $   (2.53)
                                                                       =========     =========     =========     =========

Shares used in per share calculation                                      15,376        18,289        14,356        15,154
                                                                       =========     =========     =========     =========
</TABLE>

See accompanying notes to condensed consolidated financial statements.


                                        3
<PAGE>   4
               INTEGRATED PROCESS EQUIPMENT CORP. AND SUBSIDIARIES
       CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
                 FOR THE NINE-MONTH PERIOD ENDED MARCH 31, 1997
                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                Series B                    Series C                                           
                                             Preferred Stock             Preferred Stock                 Common Stock          
                                        -------------------------    -------------------------     ------------------------    
                                          Shares         Amount        Shares         Amount         Shares        Amount      
                                        ----------     ----------    ----------     ----------     ----------    ----------    
<S>                                     <C>            <C>           <C>            <C>           <C>            <C>
Balance - June 30, 1996                     63,092     $       --            --     $       --     14,238,406    $      142    

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

Retirement of Series B-1
   Preferred Stock                          (5,369)            --            --             --             --            --    

Conversion of Series B
  Preferred Stock                          (13,738)            --            --             --        198,522             2    

Conversion of Class A
  Common Stock                                  --             --            --             --         65,000            --    

Issuance of Warrants                            --             --            --             --             --            --    

Exercise of Stock Options
 (including tax benefits of $2,014)             --             --            --             --        647,544             7    

Employee Stock Purchase Plan                    --             --            --             --         52,637            --    

Issuance of Series C Preferred Stock            --             --       100,000              1             --            --    
 (less costs of $1,600)

Conversion of Series C
  Preferred Stock                               --             --      (100,000)            (1)     1,283,961            13    

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

Dividends Paid                                  --             --            --             --             --            --    
                                        ----------     ----------    ----------     ----------     ----------    ----------    

Balance - March 31, 1997                    43,985     $       --            --     $       --     16,486,070    $      164    
                                        ==========     ==========    ==========     ==========     ==========    ==========    


<CAPTION>
                                                Class A                                              Foreign    
                                              Common Stock          Additional                      Currency    
                                        -------------------------     Paid-In      Accumulated     Translation  
                                          Shares         Amount       Capital        Deficit       Adjustment   
                                        ----------     ----------    ----------     ----------     ----------   
<S>                                     <C>            <C>           <C>            <C>            <C>          
Balance - June 30, 1996                    521,650     $        5    $  151,730     $  (23,546)    $        6   
                                                                                                                
Net loss                                        --             --            --        (38,120)            --   
                                                                                                                
Retirement of Series B-1                                                                                        
   Preferred Stock                              --             --          (500)            --             --   
                                                                                                                
Conversion of Series B                                                                                          
  Preferred Stock                               --             --            (2)            --             --   
                                                                                                                
Conversion of Class A                                                                                           
  Common Stock                             (65,000)            --            --             --             --   
                                                                                                                
Issuance of Warrants                            --             --         1,059             --             --   
                                                                                                                
Exercise of Stock Options                                                                                       
 (including tax benefits of $2,014)             --             --         9,333             --             --   
                                                                                                                
Employee Stock Purchase Plan                    --             --           698             --             --   
                                                                                                                
Issuance of Series C Preferred Stock            --             --        23,399             --             --   
 (less costs of $1,600)                                                                                         
                                                                                                                
Conversion of Series C                                                                                          
  Preferred Stock                               --             --           (12)            --             --   
                                                                                                                
Cumulative translation adjustment               --             --            --             --             36   
                                                                                                                
Dividends Paid                                  --             --            --           (558)            --   
                                        ----------     ----------    ----------     ----------     ----------   
                                                                                                                
Balance - March 31, 1997                   456,650     $        5    $  185,705     $  (62,224)    $       42   
                                        ==========     ==========    ==========     ==========     ==========   
</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,
                                                                           ---------------------
                                                                             1996         1997
                                                                           --------     --------
<S>                                                                        <C>          <C>      
Cash flows from operating activities:
   Net loss                                                                $(12,738)    $(38,120)
   Adjustments to reconcile net loss to net
     cash provided by (used in) operating activities:
        Purchased research and development                                   36,961           --
        Program discontinuance charge                                            --       17,601
        Loss on disposal of IPEC Clean, Inc., net of taxes                       --       24,950
        Depreciation and amortization                                         4,068        8,378
        Deferred tax benefit                                                (15,855)     (11,162)
        Acquisition adjustments                                                  --         (865)
        Costs of warrants issued                                                 --        1,059
        Changes in assets and liabilities:
           (Increase) in accounts receivable                                 (7,846)     (15,877)
           (Increase) decrease in inventories                                 3,435      (20,523)
           (Increase) in prepaid expenses and other assets                   (1,479)        (356)
           Increase in accounts payable                                       3,194        1,982
           Increase in accrued liabilities                                    7,703        4,774
           (Increase) decrease in net assets of discontinued operations      (7,620)         836
                                                                           --------     --------
              Net cash provided by (used in) operating activities             9,823      (27,323)
                                                                           --------     --------

Cash flows from investing activities:
    Purchases of property and equipment                                     (30,497)      (2,579)
    Proceeds from sale of property and equipment                                431       20,417
    Purchase of subsidiaries, net of cash acquired                          (23,641)          --
                                                                           --------     --------
             Net cash provided by (used in) investing activities            (53,707)      17,838
                                                                           --------     --------

Cash flows from financing activities:
    Proceeds from long-term debt                                             26,000        4,407
    Repayment of long-term debt and capital leases                          (14,409)     (17,195)
    Repayment of notes payable                                              (11,000)      (1,356)
    Payment of preferred stock dividends                                       (438)        (558)
    Net proceeds from issuance of Series C preferred stock                       --       23,400
    Net proceeds from issuance of common stock
      and warrants                                                            4,482        8,024
                                                                           --------     --------
              Net cash provided by financing activities                       4,635       16,722
                                                                           --------     --------

Effect of exchange rate changes on cash                                          --           36
                                                                           --------     --------

Net increase (decrease) in cash and cash equivalents                        (39,249)       7,273

Cash and cash equivalents, beginning of period                               65,790       11,325
                                                                           --------     --------

Cash and cash equivalents, end of period                                   $ 26,541     $ 18,598
                                                                           ========     ========





Supplemental disclosure of cash flow information:
     Cash paid for interest during the period                              $    743     $  1,644
                                                                           ========     ========
     Cash paid for taxes during the period                                 $  3,317     $    453
                                                                           ========     ========

Supplemental disclosure of noncash activities:
    Release from escrow (retirement) of Class B 6% cumulative
      convertible preferred stock issued for the Westech acquisition       $  2,000     $   (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, 1997 and for the three month and nine month periods ended March 31,
1996 and 1997 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, provisions for discontinued operations and program discontinuance
charges) necessary for the fair statement of the information presented therein.
The condensed consolidated balance sheet as of June 30, 1996 was derived from
the audited financial statements at such date.

         As more fully described in the following notes to condensed
consolidated financial statements, the Company announced its strategic decision
to focus on chemical mechanical planarization (CMP) and CMP-related products and
discontinue the operations of IPEC Clean, Inc. during the second quarter of
fiscal 1997. Prior period financial statements have been restated to reflect the
discontinuation of IPEC Clean, Inc.

         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 these 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,
1996.

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

ESTIMATES IN FINANCIAL STATEMENTS:

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

ORGANIZATION:

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


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

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

Westech Systems, Inc.:

         On September 3, 1993, IPEC acquired Westech Systems, Inc. ("Westech"),
a privately owned company engaged in manufacturing chemical mechanical
planarization equipment for the semiconductor industry. Westech was renamed IPEC
Planar Phoenix, Inc. On January 1, 1997, IPEC Planar Phoenix was renamed IPEC
Planar, Inc.

Acquisition of Athens Corp.:

         On November 22, 1994, the Company acquired approximately 94% of the
outstanding common stock of Athens Corp. ("Athens"), a privately owned company
engaged in manufacturing wet process reprocessing systems for the semiconductor
industry. The purchase price consisted of 1,095,695 shares of the Company's
common stock. The Company acquired the remaining 6% in the first quarter of
fiscal 1996 in exchange for 211,670 shares of the Company's common stock. The
name of Athens was subsequently changed to IPEC Clean, Inc. ("IPEC Clean"). The
operations of IPEC Clean were discontinued in the second quarter of fiscal 1997.

Acquisition of GAARD Automation, Inc.:

         On October 30, 1995, the Company acquired all of the outstanding common
stock of GAARD Automation, Inc. ("GAARD"), a privately owned company that
developed advanced high throughput CMP systems for metal and oxide
planarization. GAARD also designs and manufactures custom flexible automation
systems used outside the semiconductor industry. The name of GAARD was
subsequently changed to IPEC Planar Portland, Inc. On January 1, 1997, IPEC
Planar Portland was merged into IPEC Planar, Inc.

Acquisition of Precision Materials:

         On December 29, 1995, the Company's subsidiary IPEC Precision, Inc.
("Precision") acquired substantially all of the assets constituting the
Precision Materials Operation of Hughes Danbury Optical Systems, Inc. (HDOS).
Precision is engaged in the design, manufacture, and sale of precision
equipment, based on proprietary plasma assisted chemical etching and metrology
technologies, for use in the production of advanced semiconductor wafers and
devices, and provides wafer processing services that use such proprietary
technology and equipment.


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


         The aforementioned acquisitions have all been accounted for as
purchases and, accordingly, the condensed consolidated financial statements
include the results of operations from the respective dates of acquisition.

Pro forma financial information:

         Pro forma summary of consolidated operations (excluding charges for
purchased in-process research and development) for the nine months ended March
31, 1996, assuming the acquisitions of GAARD and Precision had taken place on
July 1, 1995 is as follows (in thousands, except per share amounts):

<TABLE>
<CAPTION>
                                        Nine Months Ended
                                          March 31, 1996
                                          --------------
<S>                                     <C>     
Revenues                                     $114,987
Net income from continuing operations        $ 10,312
Net income (loss)                           
  from discontinued operations               $   (591)
Net income per common share                 
  from continuing operations                 $    .72
Net income (loss) per common share          
  from discontinued operations               $   (.04)
</TABLE>

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Income (loss) per share of common stock:

         Net income (loss) per common share is computed by dividing net income
(loss) less dividends on convertible preferred stock by the weighted average
number of common shares outstanding during the period, plus, when their effect
is dilutive, common stock equivalents consisting of certain shares subject to
stock options and warrants.

New Accounting Standards:

         In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," which requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. The Company adopted Statement
121 in the first quarter of 1997, and this adoption did not have a material
impact on the condensed consolidated financial statements.

         In October 1995, the FASB issued Statement No. 123, "Accounting for
Stock Based Compensation" (SFAS 123). Under the provisions of SFAS 123,
companies can elect to account for stock-based compensation plans using a
fair-value based method or continue measuring compensation 


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

expense for those plans using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." SFAS 123 requires that companies electing to continue using the
intrinsic value method must make pro forma disclosures of net income and
earnings per share as if the fair value method had been applied. The Company has
continued to account for stock-based compensation using the intrinsic value
method which will not have an impact on the Company's results of operations or
financial position.

         In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
("Statement 128"). This Statement establishes standards for computing and
presenting earnings per share ("EPS"), and supersedes APB Opinion No. 15. The
Statement replaces primary 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. Earlier application is not permitted.
After adoption, all prior-period EPS data shall be restated to conform to
Statement 128. Basic and diluted EPS, as calculated under Statement 128 would
have been $.13 and $.11 for the three months ended March 31, 1997 and ($2.53)
and ($2.14) for the nine months ended March 31, 1997.

INVENTORIES:

         Inventories are summarized as follows (in thousands):

<TABLE>
<CAPTION>
                                                  June 30, 1996   March 31, 1997
                                                  -------------   --------------
                                                                   (Unaudited)
<S>                                               <C>             <C>     
         Raw materials                              $ 14,318         $ 27,794
         Work in process                              10,165           17,508
         Finished goods                                  906            2,856
                                                    --------         --------
                                                      25,389           48,158
         Less inventory obsolescence reserve          (1,952)         (13,199)
                                                    --------         --------

                                                    $ 23,437         $ 34,959
                                                    ========         ========
</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 has adopted a plan for the
disposition by sale of IPEC Clean within the next twelve months.

         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 three month period
ended March 31, 1996 and nine month periods ended March 31, 1996 and 1997 are as
follows:


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

<TABLE>
<CAPTION>
                               Three Months Ended     Nine Months Ended
                                 March 31, 1996           March  31,
                               ------------------   ------------------------
                                                      1996            1997
                                                    --------         -------
                                         (in thousands)
<S>                            <C>                  <C>              <C>    
Revenue                              $10,626        $ 29,641         $ 4,609
                                     =======        ========         =======
Income (loss) from
   operations before taxes             1,119            (427)         (5,495)
Income tax expense (benefit)             543             164          (1,881)
                                     -------        --------         -------
Income (loss) from operations        $   576        $   (591)        $(3,614)
                                     =======        ========         =======
</TABLE>

         The effective income tax benefit rate for discontinued operations
differs from the Company's Federal statutory rate (34%) primarily as a result of
nondeductible amortization of intangible assets.

         The Company recorded a pre-tax charge 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 in the second quarter of fiscal 1997. A charge amounting to $3.0
million was also recorded to reflect the estimated phase out costs associated
with IPEC Clean. This charge is included in accrued liabilities at March 31,
1997 in the accompanying condensed consolidated balance sheet. The tax benefit
associated with these charges amounted to $5.2 million.

         The net assets of the discontinued operation have been reclassified
from the June 30, 1996 audited financial statement presentation and are
summarized in the accompanying condensed consolidated balance sheets as follows:

<TABLE>
<CAPTION>
                                          June 30, 1996    March 31, 1997
                                          -------------    --------------
                                                  (in thousands)
<S>                                       <C>              <C>    
Current assets                              $ 19,234           $ 6,894
Property, plant and equipment, net             2,430               256
Intangible assets                             12,911                --
Other assets                                   2,127                --
Current liabilities                           (6,895)           (3,217)
Long-term debt                                   (88)               --
                                            --------           -------
                                            $ 29,719           $ 3,933
                                            ========           =======
</TABLE>

PROGRAM DISCONTINUANCE CHARGE:


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

         In the second quarter of fiscal 1997, the Company recorded a pre-tax
nonrecurring charge of $17.6 million due to discontinuance of the Avanti 672
product development program, primarily related to write-downs of inventories of
$9.0 million, write-downs of property, plant and equipment of $4.1 million and
the accrual of related noncancellable purchase orders of $4.5 million included
in accrued liabilities.

PREFERRED STOCK:

         During the six months ended December 31, 1996, 5,370 shares of B-1
Preferred Stock were released from escrow to the selling shareholders of Westech
(including a director) upon settlement of the purchase price of Westech, now
known as IPEC Planar, Inc. In accordance with the escrow settlement, the
remaining 5,369 shares of the B-1 preferred stock held in escrow were retired.

         In the second quarter of fiscal 1997 the Company sold 100,000 shares of
newly issued Series C convertible preferred stock for $25 million. On February
25, 1997, the Series C convertible preferred stock was converted into 1,283,961
shares of the Company's common stock.

         In connection with the issuance of the Series C convertible preferred
stock, the holder was granted a warrant to acquire up to 456,000 shares of the
Company's common stock. The warrant may generally be exercised from and after
June 16, 1998 until December 16, 2002 at an exercise price of $24.567 per share.

SALE/LEASEBACK:

         The Company completed an $18.7 million sale/leaseback transaction of
its Phoenix manufacturing and administrative facility in the second quarter of
fiscal 1997. The Company leased back the facility for an initial fifteen year
term with two five year renewal options. Proceeds from the transaction were used
to repay a $10 million term loan with a bank. Annual rental payments will range
between $2.1 million and $2.3 million over the next five years.

LOAN AGREEMENT:

         The Company entered into a loan agreement in April 1996 with a bank.
Under the terms of the agreement, the Company received a $10 million term loan
and a $20 million revolving loan facility, as modified, to provide working
capital for general corporate purposes. The $10 million term loan was repaid in
the second quarter of fiscal 1997. The borrowing base for the revolving loan
facility consists of eighty percent of eligible accounts receivable as defined
by the agreement.

         The facility bears interest at the Company's option at the prime rate
or LIBOR plus 2.75%. The revolving loan facility was modified in April 1997 and
extended until April 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 


                                       11
<PAGE>   12
              INTEGRATED PROCESS EQUIPMENT CORP. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)

principal plus interest. The revolving loan facility is secured by a first lien
on all assets of the Company and its subsidiaries.

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

CONTINGENCIES AND COMMITMENTS:

Concentration of credit risk:

         The Company sells products and services to customers, primarily
semiconductor manufacturers, and extends credit based on an evaluation of the
customer's financial condition, generally without requiring collateral. Exposure
to losses on receivables is principally dependent on each customer's financial
condition. The Company monitors its exposure for credit losses and maintains
allowances for anticipated losses. At March 31, 1997, accounts receivable from
the Company's largest customer amounted to $19.7 million.


                                       12
<PAGE>   13
                         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 in 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, 1996.

OVERVIEW

         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. IPEC Precision manufactures advanced
plasma-assisted chemical etching equipment and metrology equipment for use
primarily in manufacturing of silicon wafers and semiconductor devices.

         IPEC incurred a net loss of $10.7 million in fiscal 1996 compared to
net income of $0.6 million in fiscal 1995 and a net loss of $8.9 million in
fiscal 1994. The results for fiscal 1996 and 1994 were negatively impacted by
non-recurring charges related to the acquisitions of IPEC Planar Portland and
IPEC Precision in fiscal 1996 and IPEC Planar Phoenix in fiscal 1994. Purchased
research and development charges related to these acquisitions were
approximately $37.0 million and $1.1 million in fiscal 1996 and 1994,
respectively. Additionally, the Company incurred a charge amounting to
approximately $4.3 million in fiscal 1994 for debt discount and deferred
financing fees attributable to warrants issued in connection with a $5.0 million
bridge loan which was repaid from the proceeds of a public offering.

         For the nine months ended March 31, 1997, the Company incurred a net
loss of $36.9 million primarily due to the discontinuation of its IPEC Clean
business and its Avanti 672 product development effort. Financial information
has been restated to reflect the discontinuation of IPEC Clean. As a result,
dollar amounts, percentages and percentages of revenues contained in this
Quarterly Report may differ from those presented in Quarterly Reports for prior
periods. The Company incurred a $25.0 million charge for estimated losses on
disposal of IPEC Clean and a $1.9 million loss from IPEC Clean operations in the
second quarter of fiscal 1997. In addition, the Company incurred a $17.6 million
charge for asset write-downs due to the discontinuation of the Avanti 672
product development effort. As a result of the above charges, the Company will
incur a net loss in fiscal 1997. The Company also expects that revenue for
fiscal 1997 will be below revenue recorded in fiscal 1996. See "Factors
Affecting Operating Results -- Operating Results Are Subject to Quarterly
Fluctuations for Varied Reasons."


                                       13
<PAGE>   14
         The Company's revenue is derived from the sale of products, related
spare parts and service. In accordance with generally accepted accounting
principles, the Company recognizes revenue when a product is shipped. Revenue
from spare part sales or service is recognized when shipped or upon completion
of service.

         The Company's gross margin may vary due to many factors and is
especially dependent on direct versus indirect sales, product mix and domestic
versus international sales. 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. During the first three quarters of fiscal 1997, the
Company issued warrants to purchase 250,000 shares of common stock in exchange
for a customer's acceleration of orders, increasing cost of goods sold by a
total of approximately $1.1 million during the first nine months of fiscal 1997.
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, operating
margins, expenses, dividend and tax rates, and access to equity or debt
financing. 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.



                           - Continued on next page -


                                       14
<PAGE>   15
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>
                                                                          THREE MONTHS ENDED    NINE MONTHS ENDED
                                                                               MARCH 31,             MARCH 31,
                                                                          ------------------    ------------------
                                                                            1996       1997       1996      1997
                                                                           -----      -----      -----     ----- 
<S>                                                                        <C>        <C>        <C>       <C>   
Revenue                                                                    100.0%     100.0%     100.0%    100.0%
Cost of goods sold                                                          58.2%      54.6%      56.6%     58.5%
                                                                           -----      -----      -----     ----- 
      Gross margin                                                          41.8%      45.4%      43.4%     41.5%
                                                                           -----      -----      -----     ----- 

Operating expenses:
  Research and development                                                  11.5%      15.1%      10.2%     17.2%
  Purchased research and development                                          --         --       34.6%       --
  Selling, general and administrative                                       20.6%      20.9%      18.2%     20.5%
  Program discontinuance charge                                               --         --         --      17.2%
                                                                           -----      -----      -----     ----- 
       Total operating expenses                                             32.1%      36.0%      63.0%     54.9%
                                                                           -----      -----      -----     ----- 

       Operating income (loss)                                               9.7%       9.4%     (19.6)%   (13.4)%

Other income (expense):
  Interest income                                                            .9 %        .5%       1.4%       .4%
  Interest expense                                                         (2.8)%       (.6)%     (1.2)%    (1.4)%
  Other, net                                                                 .5 %        --         .3%       .3%
                                                                           -----      -----      -----     ----- 
       Total other income (expense)                                        (1.4)%       (.1)%       .5%      (.7)%
                                                                           -----      -----      -----     ----- 

       Income (loss) from continuing operations before income taxes         8.3%        9.3%     (19.1)%   (14.1)%
Income tax benefit                                                          3.0%        3.5%      (7.7)%    (4.7)%
                                                                           -----       -----      -----     ----- 
       Net income (loss) from continuing operations                         5.3%        5.8%     (11.4)%    (9.4)%

Discontinued operations:
  Income (loss) from operations of IPEC Clean, Inc., net of taxes           1.4%         --        (.5)%    (3.6)%
  Loss on disposal of IPEC Clean, Inc., net of taxes                         --          --         --     (24.4)%
                                                                          -----       -----      -----     ----- 
       Net income (loss) from discontinued operations                       1.4%         --        (.5)%   (28.0)%
                                                                          -----       -----      -----     ----- 

       Net income (loss)                                                    6.7%        5.8%     (11.9)%   (37.4)%

Cumulative dividend on preferred stock                                      (.2)%       (.2)%      (.5)%     (.2)%
                                                                           -----       -----      -----     ----- 

       Net income (loss) attributable to common stockholders                6.5%        5.6%     (12.4)%   (37.6)%
                                                                           =====      =====      =====     =====
</TABLE>

QUARTER ENDED MARCH 31, 1997 COMPARED TO QUARTER ENDED MARCH 31, 1996

         Revenue. Revenue was $37.0 million for the quarter ended March 31, 1997
compared to $39.9 million for the quarter ended March 31, 1996. The 7% decrease
was primarily attributable to an industry-wide slowdown in semiconductor capital
equipment shipments in fiscal 1997 which adversely 


                                       15
<PAGE>   16
affected sales of the Company's CMP equipment. Revenue from foreign sales
represented 32% and 35% of total revenue in the third quarter of fiscal 1996 and
fiscal 1997, respectively. Backlog at March 31, 1997 was approximately $54
million compared to backlog of approximately $49 million at December 31, 1996.
The Company expects that revenue for the year ending June 30, 1997 will be below
revenue reported for the year ended June 30, 1996.

         Cost of goods sold. Cost of goods sold decreased as a percentage of
revenue to 54.6% for the quarter ended March 31, 1997 from 58.2% for the quarter
ended March 31, 1996. Gross margins during the quarter ended March 31, 1997 were
favorably affected, when compared to the quarter ended March 31, 1996, by a $1.8
million reduction in distributor discounts, resulting from the Company's planned
transition to direct sales and field service. This benefit was partially offset
by a $0.2 million increase in cost of goods sold related to warrants issued to a
major customer in connection with an agreement permitting the Company to
accelerate certain deliveries in the first, second and third quarters of fiscal
1997. During the quarter ended March 31, 1997 the customer accelerated orders
under this agreement that accounted for approximately 21% of revenue. The charge
in a quarter is based on the market value of the warrant shares on the date of
the agreement and the incremental number of warrant shares issued in the
quarter. Margins were adversely impacted in the quarter ended March 31, 1996 by
volume purchase agreement sales to a major customer. Gross margin percentages at
IPEC Precision were consistent with those at IPEC Planar for the quarter ended
March 31, 1997. As of March 31, 1997 all warrants under the agreement have been
issued and all charges relating to the agreement have been incurred.

         The Company's gross margin is impacted by a number of factors, such as
product mix, material costs and the level of international sales, which may
result in greater sales discounts and lower gross margin. Since IPEC Precision
is commencing operations and its customer base is new, the Company believes that
IPEC Precision's gross margin percentage could be lower than the gross margin
attained for the Company's CMP tools. As new products are introduced by IPEC
Precision in future quarters, the Company's gross margin may fluctuate. During
the Company's planned transition to direct sales and field service, distributor
discounts will continue to negatively impact gross margin. Gross margin in
future periods may be higher or lower than those in the first nine months of
fiscal 1997, depending on such factors. See "Factors Affecting Operating
Results -- Operating Results Are Subject to Quarterly Fluctuations for Varied
Reasons."

         Research and development. Research and development expense increased
22% to $5.6 million for the quarter ended March 31, 1997 from $4.6 million for
the quarter ended March 31, 1996, and increased as a percentage of revenue to
15.1% in the quarter ended March 31, 1997 from 11.5% in the quarter ended March
31, 1996. This increase was primarily due to development of the Company's
AvantGaard 676 and AvantGaard 776 high-throughput CMP tools.

         Selling, general and administrative. Selling, general and
administrative expenses decreased 5% to $7.8 million for the quarter ended March
31, 1997 from $8.2 million in the quarter ended March 31, 1996, and increased as
a percentage of revenue to 20.9% in the quarter ended March 31, 1997 from 20.6%
in the quarter ended March 31, 1996. Work force reductions in the first and
second quarters of fiscal 1997 reduced salary expense at IPEC Planar and IPEC
Precision by approximately $0.2 million per quarter. These reductions were
partially offset by a $0.4 million charge for costs incurred during the third
quarter of fiscal 1997 in connection with the Company's withdrawn equity
offering. Absolute 


                                       16
<PAGE>   17
dollar expenses were greater in the quarter ended March 31, 1996 compared to the
quarter ended March 31, 1997 primarily as a result of additional personnel,
sales commissions and professional fees.

         Interest income. Interest income decreased to $0.2 million for the
quarter ended March 31, 1997 from $0.4 million for the quarter ended March 31,
1996 as a result of lower average cash and cash equivalent balances in fiscal
1997. Higher balances in the second quarter of fiscal 1996 resulted from the
exercise of warrants in the fourth quarter of fiscal 1995, providing $63.2
million of cash proceeds to the Company.

         Interest expense. Interest expense decreased to $0.2 million for the
quarter ended March 31, 1997 from $1.1 million for the quarter ended March 31,
1996 as a result of reduced borrowing levels at lower interest rates.

         Income tax expense. Income tax expense was $1.3 million and $1.2
million for the quarters ending March 31, 1997 and 1996, or effective tax rates
of 38% and 36%, respectively. The higher effective rate for the fiscal 1997
period resulted primarily from adjustments of deferred tax balances and state
tax accruals.

         Discontinued Operations. As a result of the Company's decision to focus
on CMP and CMP-related products, the Company decided to divest the operations of
IPEC Clean and recorded a $25.0 million loss on disposal of IPEC Clean for the
quarter ended December 31, 1996. The operating results of IPEC Clean have been
segregated from the continuing operations of the Company and reported as
discontinued operations for all periods presented. Income from operations of
IPEC Clean amounted to $0.6 million for the quarter ended March 31, 1996.
Results of operations of IPEC Clean for the quarter ended March 31, 1997 were
charged to an accrued liability established in the quarter ended December 31,
1996 for estimated phase out costs in connection with the loss on disposal of
IPEC Clean.

         Net income per share. Net income per share was $.11 for the quarter
ended March 31, 1997 compared to $.17 for the quarter ended March 31, 1996.
After giving effect to discontinued operations of IPEC Clean, net income per
share from continuing operations was $.13 for the quarter ended March 31, 1996.
Average shares outstanding used in the per share calculation increased from
15,376,000 for the quarter ended March 31, 1996 to 18,289,000 for the quarter
ended March 31, 1997. The increase in average shares outstanding results
primarily from the issuance of Series C Preferred Stock issued in the quarter
ended December 31, 1996, subsequently converted to common stock in the quarter
ended March 31, 1997 and the exercise of stock options during the quarter ended
March 31, 1997.

NINE MONTHS ENDED MARCH 31, 1997 COMPARED TO NINE MONTHS ENDED MARCH 31, 1996

         Revenue. Revenue was $102.1 million for the nine months ended March 31,
1997 compared to $106.8 million for the nine months ended March 31, 1996. This
4% decrease was primarily attributable to an industry-wide slowdown in
semiconductor capital equipment shipments in the first nine months of fiscal
1997, which adversely affected sales of the Company's CMP equipment. Revenue
from foreign sales represented 26% and 36% of total sales in the first nine
months for fiscal 1997 and fiscal 1996, respectively. The Company expects that
revenue for the year ending June 30, 1997 will be below revenue reported for the
year ended June 30, 1996.


                                       17
<PAGE>   18
         Cost of goods sold. Cost of goods sold increased as a percentage of
revenue to 58.5% in the first nine months of fiscal 1997 from 56.6% in the first
nine months of fiscal 1996. Cost of goods sold increased as a percentage of
revenue in the first nine months of fiscal 1997 due to the allocation of higher
levels of customer service expenditures across lower revenue, costs associated
with suspending material procurement for the Avanti 672 program and a higher
percentage of sales through international distributors. Gross margin during the
first nine months of fiscal 1997 was also adversely affected by a $1.1 million
increase in cost of goods sold related to warrants issued to a major customer in
connection with an agreement permitting the Company to accelerate certain
deliveries in the first, second and third quarters of fiscal 1997. During the
first nine months of fiscal 1997 the customer accelerated orders under this
agreement that accounted for approximately 20% of revenue. The charge in a
quarter is based on the market value of the warrant shares on the date of the
agreement and the incremental number of warrant shares issued in the quarter. As
of March 31, 1997 all warrants under the agreement have been issued and all
charges relating to the agreement have been incurred.

         Research and development. Research and development expense increased
61% to $17.5 million in the first nine months of fiscal 1997 from $10.9 million
in the first nine months of fiscal 1996, and increased as a percentage of
revenue to 17.2% in the first nine months of fiscal 1997 from 10.2% in the first
nine months of fiscal 1996. This increase was primarily due to development of
the Company's AvantGaard 776, AvantGaard 676 and Avanti 672 high-throughput CMP
tools. The Avanti 672 program was discontinued in the second quarter of fiscal
1997. Incremental costs of $2.0 million, or 2% of revenues, in the first nine
months of 1997 were incurred at IPEC Precision for the development of
proprietary plasma-assisted chemical etching and metrology technology.

         Purchased research and development. The Company incurred a charge of
$37.0 million for purchased in-process research and development in the first
nine months of fiscal 1996 as a result of the acquisitions of GAARD and
Precision.

     Selling, general and administrative. Selling, general and administrative
expenses increased 8% to $20.9 million in the first nine months of fiscal 1997
from $19.4 million in the first nine months of fiscal 1996, and increased as a
percentage of revenue to 20.5% in the first nine months of fiscal 1997 from
18.2% in the first nine months of fiscal 1996. This increase was primarily due
to incremental selling, general and administrative expenses at IPEC Precision,
additional depreciation, amortization and overhead resulting from acquisitions
completed in the first half of fiscal 1996, additional depreciation for the
Company's Phoenix manufacturing and administrative facility and a $0.4 million
charge for costs incurred in connection with the Company's withdrawn equity
offering in the quarter ended March 31, 1997. These expenses were partially
offset by work force reductions in the first and second quarters of fiscal 1997
which reduced salary expense at IPEC Planar and IPEC Precision by approximately
$0.2 million per quarter. Selling, general and administrative expenses for the
first nine months of fiscal 1997 were offset in part by a $0.9 million benefit
resulting from adjustments for both the fiscal 1994 IPEC Planar Phoenix and
fiscal 1996 IPEC Planar Portland acquisitions.

     Program discontinuance charge. The Company has demonstrated that the
AvantGaard 676 tool can be used for both metal and oxide planarization,
resulting in a decision to focus solely on the AvantGaard 676 as the next
generation CMP tool. Accordingly, the Company incurred a $17.6 million program
discontinuance charge in the first nine months of fiscal 1997 from write-downs
of inventory and assets relating to the Company's discontinuation of the Avanti
672 program. See "Factors Affecting Operating 


                                       18
<PAGE>   19
Results -- Product Development Difficulties Could Adversely Affect the Company's
Results of Operations."

     Interest income. Interest income decreased to $0.4 million in the first
nine months of fiscal 1997 from $1.5 million in the first nine months of fiscal
1996 as a result of lower average cash and cash equivalent balances in fiscal
1997. Higher average cash and cash equivalent balances in fiscal 1996 resulted
from the exercise of warrants in the fourth quarter of fiscal 1995, providing
$63.2 million of cash proceeds to the Company. Cash generated from the
convertible preferred stock financing and the sale/leaseback of the Phoenix
manufacturing and administrative facility, discussed in "Liquidity and Capital
Resources" below, did not affect interest income in fiscal 1997 until the
quarter ended March 31, 1997.

     Interest expense. Interest expense increased slightly to $1.4 million in
the first nine months of fiscal 1997 as a result of increased average borrowings
in fiscal 1997.

     Income (loss) from continuing operations before income taxes. Losses from
continuing operations before income tax expense were $14.4 million and $20.4
million for the nine months ended March 31, 1997 and 1996, respectively. Losses
in 1997 resulted from the $17.6 program discontinuance charge described above.
Losses in 1996 resulted from the $37.0 million purchased research and
development charge described above.

     Income tax expense. Income tax benefit was $4.8 million and $8.3 million
for the nine-month periods of fiscal 1997 and 1996, or effective tax benefit
rates of 34% and 40%, respectively. The lower benefit rate for the fiscal 1997
nine-month period resulted primarily from adjustments of deferred tax balances
and state tax accruals.

     Income (loss) from discontinued operations. As a result of the Company's
decision to focus on CMP and CMP-related products, the Company has decided to
divest the operations of IPEC Clean. The operating results of IPEC Clean have
been segregated from the continuing operations of the Company and reported
separately as discontinued operations for all periods presented. The loss from
discontinued operations of IPEC Clean increased to $28.6 million in the first
nine months of fiscal 1997 from $0.6 million in the first nine months of fiscal
1996. The loss for the fiscal 1997 period included $25.0 million for the
estimated loss on disposal of IPEC Clean. See "Factors Affecting Operating
Results -- Future Acquisitions and Dispositions May Require Significant
Resources and Adversely Affect Results."

LIQUIDITY AND CAPITAL RESOURCES

     The Company's principal sources of liquidity include cash and cash
equivalents of $18.6 million at March 31, 1997. An additional $11.4 million was
available under a revolving loan facility for borrowings at March 31, 1997,
based on eligible accounts receivable that can be used to collateralize such
borrowings.

     During the second quarter of fiscal 1997, the Company issued 100,000 shares
of Series C Preferred Stock (all of which were converted into 1,283,961 shares
of Common Stock on February 25, 1997) and a warrant to purchase up to 456,000
shares of Common Stock in exchange for $25.0 million. During the second quarter
of fiscal 1997, the Company also completed a sale/leaseback of its 150,000
square foot 


                                       19
<PAGE>   20
Phoenix manufacturing and administrative facility. The facility was sold for
$18.7 million and leased back to the Company for an initial 15-year term and two
five-year renewal options. Proceeds from these financings were used to repay a
$10.0 million term loan and for working capital purposes.

     The Company entered into a loan agreement with a bank in April 1996. Under
the terms of the agreement, as modified, the Company received a $10.0 million
term loan and a $20.0 million revolving loan facility to provide working capital
and for general corporate purposes. Proceeds from the loan agreement were
utilized to pay $16.0 million of debt incurred in connection with the
acquisition of IPEC Precision. The loan agreement includes various covenants,
including, among other things, maintenance of certain financial ratios and
limitations on the amount of dividends that can be paid to stockholders. The
loan agreement has been extended to April 1998.

     The Company's accounts receivable increased to $49.9 million at March 31,
1997 compared to $34.1 million at June 30, 1996. The increase was primarily due
to higher levels of sales in March 1997. Additionally, in certain instances more
favorable credit terms were granted to international customers and to customers
purchasing initial AvantGaard 676 tools.

     The Company's inventory has increased to $35.0 million at March 31, 1997
from $23.4 million at June 30, 1996. This was primarily due to the ramping of
production of the Company's AvantGaard 676 and increased levels of manufacturing
at IPEC Precision. As of March 31, 1997 the Company's current ratio of current
assets to current liabilities was 2.8 to 1.0 and working capital was $78.9
million. As of June 30, 1996 the Company's current ratio of current assets to
current liabilities was 3.1 to 1.0 and working capital was $71.1 million.

     The Company's property, plant and equipment decreased to $24.8 million at
March 31, 1997 from $50.2 million at June 30, 1996 primarily as a result of the
sale/leaseback of the Phoenix manufacturing and administrative facility in the
second quarter of fiscal 1997.

     Total long-term debt has decreased to $14.2 million at March 31, 1997 from
$24.8 million at June 30, 1996 primarily as a result of repayments of debt from
the proceeds of the sale/leaseback transaction and the $25 million Series C
convertible preferred stock offering. Total long-term debt as a percentage of
stockholders' equity decreased to 11% at March 31, 1997 from 19% at June 30,
1996.

     The Company believes that its cash and cash equivalents will be sufficient
to fund its operations through the end of calendar 1997. The Company's cash
needs depend on 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. Additional new debt or equity financing will
likely be required in the future to fund the Company's operations. 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 invest
in capital equipment and working capital.

FACTORS AFFECTING OPERATING RESULTS


                                       20
<PAGE>   21
         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 a net
loss in fiscal 1994 and fiscal 1996 of $8.9 million and $10.7 million,
respectively. The Company had a net loss of $3.4 million in the first quarter of
fiscal 1997. The Company had a net loss of approximately $36.9 million in the
second quarter of fiscal 1997, due to one-time charges of approximately $42.6
million in the quarter due to discontinuation of the business of IPEC Clean and
of a research and development program. As a result, the Company will have a net
loss for fiscal 1997. 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; the timing of
significant shipments; accelerations, delays, cancellations or postponement of
orders; acceptance of the Company's products; the gain or loss of significant
customers; competitive pressures; availability and costs of components from the
Company's suppliers; the timing of product announcements and introductions by
the Company, its customers or its competitors; 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 and the sufficiency of
capital resources to support operations at current levels. The Company's margin
improvement plan is predicated on higher volume production of its AvantGaard
676, 776 and IPEC Precision products. 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. For example, the Company's
results in fiscal 1994 were adversely impacted by an engineering redesign of its
372M CMP product. In the second quarters of fiscal 1995 and 1996, the Company
had losses due to nonrecurring charges associated with the IPEC Clean, IPEC
Planar Portland and IPEC Precision acquisitions. The Company had a loss in the
first quarter of fiscal 1997, primarily because IPEC Clean and IPEC Precision
manufactured products and incurred operating expenses based on sales plans which
were not achieved, and to a lesser degree due to 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 for estimated losses on disposal of IPEC Clean and a $17.6
million charge for asset write-downs due to discontinuation of the Company's
Avanti 672 product development effort. The semiconductor equipment market
experienced an industry-wide slowdown of semiconductor capital equipment
shipments 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, second and third quarters of fiscal 1997 was
lower than such revenue achieved in the fourth quarter of fiscal 1996. In
addition, 20% of the Company's revenue in the first nine months of fiscal 1997
resulted from acceleration by a major customer of orders in exchange for which
the Company committed to issue warrants to purchase the Company's Common Stock
to the customer. The Company expects that fiscal 1997 revenue will be below
fiscal 1996 revenue. The Company cannot assure that it will be profitable in
future quarters.


                                       21
<PAGE>   22
         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.

         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 $1.4 million per unit and the sale of a clustered
system 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. While the customer has acknowledged receipt of these
machines, they have not all been delivered to the customer's facilities and
placed into service, which could adversely affect the Company's ability to
obtain orders from this customer in fiscal 1998 to replace accelerated orders. 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.

         The Company Depends on a Small Number of Major Customers. A small
number of customers account for a significant percentage of the Company's sales
volume and revenue. In fiscal 1995, Intel, IBM and Motorola represented 16%, 24%
and 16%, respectively, of the Company's revenue. In fiscal 1996, Intel and IBM
represented 35% and 11% of the Company's revenue, respectively. In the first
nine months of fiscal 1997, Intel represented 46% 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 must
determine shortly whether to adopt the Company's new AvantGaard 676 or to adopt
comparable high-throughput products from the Company's competitors. Any such
determination by a major customer, particularly Intel, would have a material
adverse effect on the Company's business, financial condition and results of
operations. 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 Must Develop New Products Due to Technological Change. The
Company derives virtually all 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 facility
construction projects and facility upgrades. The Company's strategy depends in
part on developing and 


                                       22
<PAGE>   23
introducing products which 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
develop and enhance its existing products and develop new products to meet such
anticipated technological changes.

         The Company Depends on Broader Industry Acceptance of CMP and the
AvantGaard 676. The CMP process has not yet been broadly adopted by
semiconductor manufacturers for volume production. Most semiconductor
manufacturers who have CMP equipment use it only for pilot line production, and
few semiconductor manufacturers produce commercial quantities of integrated
circuits using CMP machines. The Company believes that only 13 of the Company's
more than 65 customers presently use the Company's CMP systems for volume
production of semiconductor devices. 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 analyst's assumptions, and
variations in industry demand can occur during the several years included in the
projections. The Company cannot assure that projected industry growth will
occur. No assurance can be given as to the willingness of semiconductor
manufacturers to adopt CMP processes and the determination of such manufacturers
not to do so would have a material adverse effect on the Company's business,
financial condition and results of operation.

         The Company's future results depend on sales of the AvantGaard 676 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 other high-throughput CMP systems, the
Company expects its reliance on sales of the AvantGaard 676 to increase in the
future. As of March 31, 1997, the AvantGaard 676 had been sold to 11 customers.
The AvantGaard 676 was initially designed solely to planarize metal layers and
has not been widely used for this purpose in volume production. The Company's
oxide process for the AvantGaard 676 was recently developed. The Company
believes that the oxide process is being used by a very limited number of
customers. In some cases prospective customers use proprietary or customized
processes, which can extend the oxide qualification process. The Company has
invested in its inventory in anticipation of future sales of the AvantGaard 676,
AvantGaard 776 and IPEC Precision's products. The Company would be adversely
affected to the extent these planned sales do no materialize. If commercial use
does not confirm the utility of the AvantGaard 676 for both oxide and metal
processes, or if customers do not broadly adopt the AvantGaard 676, 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 towards semiconductor wafer manufacturers
and have not been adopted by these or other semiconductor industry customers.
There can be no assurance that customers will accept these products, or that
these products can be sold profitably or in volume.

         Product Development Difficulties Could Adversely Affect the Company's
Results of Operations. The Company's current product development efforts include
the AvantGaard 776, which is being designed to integrate CMP, metrology and
wafer cleaning, and the development of systems for slurry 


                                       23
<PAGE>   24
reprocessing, plasma-assisted chemical etch and thin film thickness measurement.
Semiconductor equipment companies often experience delays in completing advanced
products. 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 will be commercially adopted. 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 asset write-off in the second quarter of fiscal
1997 for discontinuance of the Avanti 672 product development program. If the
AvantGaard 776 is not commercialized in a timely manner, such delay would have a
material adverse effect on the Company's business, financial condition and
results of operations. 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 polisher systems and clustered CMP polisher 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. ("SpeedFam") 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 products for this market or to develop alternative
technologies which may reduce the need for the Company's products. For example,
Lam Research Corp. recently announced an agreement to acquire OnTrak Systems
Inc., a manufacturer of wafer cleaning systems which is developing a CMP tool.

         The trend towards 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 world-wide basis and to invest in both product and
process research and development. Certain current and potential competitors,
including Applied Materials, have substantially greater financial resources,
name recognition and more extensive engineering, manufacturing, marketing and
customer service and support capabilities 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.
Customers may stage competitions between alternative CMP tools and select one
for broad-based deployment. The result of such competition could adversely
affect the Company. Moreover, increased competitive pressure could lead to
intensified price based competition, 


                                       24
<PAGE>   25
which could have a materially 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 28% and 21% of the Company's
revenue in fiscal 1996 and 1995, respectively. International sales were
approximately 36% of revenue in the first nine months of fiscal 1997. The
Company's international sales historically have had lower gross margins than
domestic sales since these sales were 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, 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. Asian manufacturers may develop alternatives to CMP, or may enhance
existing manufacturing techniques such as spin-on glass and deposited glass, 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 Asian countries through sales representatives
and distributors. If the Company determines to develop a direct presence in
these markets, particularly Japan, such decision would require the allocation of
substantial management and financial resources, may adversely affect the
Company's relationship with its current distributors, and would 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. However,
the semiconductor industry is currently experiencing a downturn, which could
have a severe adverse effect on the industry's demand for semiconductor
processing equipment. 


                                       25
<PAGE>   26
In certain instances, industry downturns have lasted for extended periods of
time. 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 recent downturn
in the market will not continue.

         The Company's planned operations assume that a significant portion of
new orders will result from demand from semiconductor manufacturers building or
expanding fabrication facilities for advanced multi-level semiconductor devices
with design requirements of 0.5 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, 1995 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 marketing, customer
support and administrative functions. The companies acquired had not operated
profitably before their acquisition by IPEC. IPEC Clean, acquired in fiscal
1995, did not operate profitably and was discontinued by the Company in the
second quarter of fiscal 1997, resulting in a $25 million charge in that
quarter. IPEC Precision has not yet 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.

         Future Acquisitions, Dispositions or Joint Development Efforts 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. In addition, the Company may make acquisitions 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 outstanding Common Stock. 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 may dispose of or spin-off portions of its business which
the Company determines are not complementary to its strategy. The Company plans
to dispose of IPEC Clean by selling or closing down its operations by the end of
calendar 1997. Discussions with potential acquirers are at an early stage, and
there can be no assurance of the terms, if any, of a sale. In the event a sale
cannot be achieved by the end of calendar 1997, the Company plans to shut down
IPEC Clean's operations. The IPEC Clean disposition effort could absorb
significant management time and adversely affect the Company's business,
financial condition and results of operations.

         The Company is considering the possibility of entering into joint
venture or research and product development relationships with other companies
with respect to its advanced plasma-assisted etching 


                                       26
<PAGE>   27
equipment and metrology equipment used in the manufacturing of silicon wafers
and semiconductor devices. Such a relationship could include the contribution of
the assets of IPEC Precision to a joint venture with another company. The
Company has not entered into any definitive agreement at this time. Since no
specific structure for a joint venture or other arrangement has been determined,
the Company cannot predict its obligations under or the financial consequences
of such an arrangement. There can be no assurance that the Company will be able
to enter into such an agreement, would retain a significant interest in the
business of IPEC Precision in the event of such an agreement or would reduce
expenses relating to IPEC Precision's business, or that any such joint venture
would be successful.

         Acceleration of Product Shipments Due to Issuance of Warrants Has
Increased Revenue and Cost of Goods Sold and May Affect Future Shipments. The
Company's fiscal 1997 operating results will be affected by the Company's
exercise of its right to cause a significant customer to accelerate planned
orders and the issuance to the customer of warrants to purchase IPEC Common
Stock. During the first quarter of fiscal 1997, the customer agreed to
accelerate certain orders into the first three quarters of fiscal 1997. In
consideration for the acceleration, the Company committed to issue, during the
first three quarters of fiscal 1997, warrants to purchase an aggregate minimum
of 155,000 shares and an aggregate maximum of 250,000 shares of Common Stock.
Costs associated with the issuance of warrants to purchase a minimum of 155,000
shares were incurred in the first quarter of fiscal 1997, resulting in a
$657,000 increase in cost of goods sold. The Company accelerated orders in the
second quarter of fiscal 1997, issuing an additional warrant to purchase 90,000
shares and recognizing costs associated with 45,000 of these shares, resulting
in a $191,000 increase in cost of goods sold. The Company accelerated additional
orders into the third quarter of fiscal 1997, issuing an additional warrant to
purchase 100,000 shares and recognizing costs associated with 50,000 of these
shares, resulting in a $211,000 increase in cost of goods sold. To the extent
orders have been accelerated during the first three quarters of fiscal 1997,
this may reduce shipments anticipated for fiscal 1998. There can be no assurance
that the Company can obtain replacement orders for shipment in these future
periods. While the customer has acknowledged receipt of these machines, they
have not all been delivered to the customer's facilities and placed into
service, which could adversely affect the Company's ability to obtain
replacement orders from this customer.

         The Company's Efforts to Market Product Bays Are at an Early Stage.
During fiscal 1996, the Company commenced an effort to market product bays
consisting of the CMP process, CMP tools, metrology, chemical and slurry
distribution, slurry reprocessing, deionized water filtration and additional
support systems. The Company has shipped only two product bays to one customer.
The Company may need access to certain products manufactured by IPEC Clean for
product bays, such as the Exxflow CMP Water Recovery System, chemical
distribution systems and wet chemical reprocessors. Due to the early stage of
efforts to dispose of IPEC Clean, the Company cannot predict whether it will
continue to have access to these products and the inability to do so could
hinder the Company's ability to sell product bays.

         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 


                                       27
<PAGE>   28
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 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. The two initial
patents relating to the Company's single wafer planarization system products are
scheduled to expire in 1997. In 1993, the technology covered by these patents
currently forming the basis of the CMP process and used in the Company's primary
products was licensed on a royalty-free basis to a competitor. This license was
granted pursuant to a settlement arrangement in which the Company also incurred
settlement obligations aggregating $1.4 million, of which $100,000 remained
outstanding at March 31, 1997. To the extent that a competitor of the Company is
able to reproduce or otherwise capitalize on the Company's technology prior to
the issuance of a patent, 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 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, which may be released from escrow if the Company does
not meet certain criteria regarding product or spare part delivery schedules to
the manufacturer. If the data is 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 Subject to Infringement Claims. In the future the
Company may 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. The Company's application to register the trademark
"IPEC" has been opposed in the U.S. Patent and Trademark Office by Dow Corning
Corporation, which owns the registered trademark "HIPEC." The Company has filed
an answer but cannot predict the outcome due to the early stage of the
proceedings. 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.


                                       28
<PAGE>   29
         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. For example, in
June 1995 and in July 1996, acid reprocessors sold by IPEC Clean malfunctioned
and allowed sulfuric acid to escape from the quartz cylinder containers. In
these instances, no acid escaped from the compartment containing the quartz
cylinder and no damage to the manufacturing facility resulted. 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.

         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 and the competition for such personnel is
intense. The loss of certain key people or the Company's inability to attract
and retain new key employees could have a material adverse effect on the
Company's business, financial condition and results of operations. In
particular, the Company believes that its future success is highly dependent on
Sanjeev R. Chitre, its Chief Executive Officer, and Thomas C. McKee, its
President and Chief Operating Officer. During July and October 1996, 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's announcement that it intends to discontinue IPEC Clean's operations
could adversely affect retention of IPEC Clean personnel. If key employees
depart IPEC Clean, this could adversely affect IPEC Clean's operations, which in
turn could adversely affect the Company's ability to sell IPEC Clean.

         The Company's Stock Price is Volatile. The Company's Common Stock has
experienced substantial price volatility and such volatility may occur in the
future, particularly as a result of quarter to quarter variations in the actual
or anticipated financial results of the Company or of other companies in the
semiconductor industry, or in the markets served by the Company, or
announcements by the Company or its competitors regarding new product
introductions. In addition, the stock market has experienced extreme price and
volume fluctuations that have affected the market price of many technology
companies' stocks in particular and that have often been unrelated or
disproportionate to the operating performance of these companies. These factors
may adversely affect the market price of the Common Stock.


                                       29

<PAGE>   30
ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K

         (a)      Exhibits

                  10.1     Amendment to Loan Agreement between Wells Fargo Bank
                           and Integrated Process Equipment Corp., dated March
                           28, 1997.

         (b)      Reports on Form 8-K:

                  A report on Form 8-K was filed on March 6, 1997 reporting
                  (under Item 5) with respect to the adoption of a stockholder
                  rights plan and announcing that the Company filed a
                  Registration Statement on Form S-3 with the Securities and
                  Exchange Commission relating to a proposed public offering of
                  3,000,000 shares of common stock. On April 10, 1997 the
                  Company filed a Request for Withdrawal of Registration
                  Statement on Form S-3 relating to the proposed public offering
                  of 3,000,000 shares of common stock.


                                       30
<PAGE>   31
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 14, 1997                         INTEGRATED PROCESS EQUIPMENT CORP.
                                           AND SUBSIDIARIES


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


                                       31