<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 December 31, 1998

                                       OR

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

For the transition period from                   to 
                               -----------------    ----------------------------
Commission file number 0-20470

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

<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 February 5, 1999, 7,186 shares of Class A Common Stock and
17,906,831 shares of Common Stock of the registrant were outstanding.

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

ITEM 1. FINANCIAL STATEMENTS

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


                                                                                          JUNE 30,        DECEMBER 31
                                                    ASSETS                                  1998             1998
                                                                                         ---------        ---------
<S>                                                                                      <C>              <C>      
                                                                                                          (UNAUDITED)
Current assets:
    Cash and cash equivalents                                                            $  14,098        $   7,866
    Short term investments                                                                  70,032           59,646
    Accounts receivable                                                                     43,837           30,308
    Inventories                                                                             67,049           69,192
    Prepaid expenses                                                                         2,686            1,753
                                                                                         ---------        ---------
            Total current assets                                                           197,702          168,765
                                                                                         ---------        ---------

Property, plant and equipment, net                                                          34,883           31,061
Intangible assets, net                                                                       8,820            7,950
Other assets                                                                                 4,483            4,076
                                                                                         ---------        ---------
                                                                                         $ 245,888        $ 211,852
                                                                                         =========        =========

                                     LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
    Current portion of long-term debt                                                    $   1,555        $   1,260
    Accounts payable                                                                        10,443            5,320
    Accrued liabilities                                                                     21,528           17,638
                                                                                         ---------        ---------
            Total current liabilities                                                       33,526           24,218

Long-term debt, less current portion                                                       117,078          116,650
                                                                                         ---------        ---------
           Total liabilities                                                               150,604          140,868
                                                                                         ---------        ---------
Stockholders' equity:
Preferred stock, $ .01 par value per share. Nonvoting, authorized
    2,000,000 shares:
    Series B-1 cumulative preferred stock.  Authorized 21,478 shares,
      issued and outstanding 14,408 shares at June 30, 1998 and 7,204 shares at
      December 31, 1998.  Liquidation preference of $671                                        --               --
    Series B-2 cumulative preferred stock.  Authorized 21,478 shares,
      issued and outstanding 19,544 shares at June 30, 1998 and December 31,
      1998 Liquidation preference of $1,820.                                                     --               --
    Series B-3 cumulative preferred stock.  Authorized 21,478 shares,
      issued and outstanding 9,898 shares at June 30, 1998 and December 31,
      1998 Liquidation preference of $922.                                                       --               --
    Series D preferred stock, $.01 par value per share.  Authorized 50,000 shares,
      1,000 votes per share; no shares issued and outstanding                                   --               --
Common stock, $.01 par value per share.  Authorized 50,000,000 shares;
    one vote per share; issued and outstanding 
    17,530,368 shares at June 30, 1998 and 17,906,000 at December 31, 1998                     175              178
Class A common stock, $.01 par value per share.  Authorized 3,500,000                           --               --
    shares, four votes per share; issued and outstanding 223,675 shares at
    June 30, 1998 and 7,186 shares at December 31, 1998                                          2               --
Additional paid-in capital                                                                 196,242          196,594
Accumulated deficit                                                                       (100,355)        (124,673)
Foreign currency translation adjustment                                                       (780)          (1,115)
                                                                                         ---------        ---------
            Total stockholders' equity                                                      95,284           70,984
                                                                                         ---------        ---------
                                                                                         $ 245,888        $ 211,852
                                                                                         =========        =========
</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          SIX MONTHS ENDED
                                                                                    DECEMBER 31,                DECEMBER 31,
                                                                             ---------------------       ------------------------
                                                                                1997        1998             1997         1998
                                                                             ---------  ----------        ---------    ----------
                                                                                                                       
<S>                                                                          <C>         <C>              <C>          <C>      
Revenue                                                                      $  57,879   $  17,704        $ 109,153    $  42,658

Cost of goods sold                                                              31,582      15,241           60,660       34,730
                                                                             ---------   ---------        ---------    --------- 
          Gross margin                                                          26,297       2,463           48,493        7,928
                                                                             ---------   ---------        ---------    --------- 

Operating expenses:
    Research and development                                                     8,341       8,508           15,050       16,808
    Selling, general and administrative                                          9,780       6,905           17,568       15,149
                                                                             ---------   ---------        ---------    --------- 
          Total operating expenses                                              18,121      15,413           32,618       31,957
                                                                             ---------   ---------        ---------    --------- 

          Operating income (loss)                                                8,176     (12,950)          15,875      (24,029)

Other income (expense):
    Interest income                                                              1,584         983            1,787        1,934
    Interest expense                                                            (1,953)     (2,013)          (2,426)      (4,039)
    Other, net                                                                       2         (15)              17        2,041
                                                                             ---------   ---------        ---------    --------- 
          Total other income (expense)                                            (367)     (1,045)            (622)         (64)
                                                                             ---------   ---------        ---------    --------- 

          Income (loss) from continuing operations before income taxes           7,809     (13,995)          15,253      (24,093)

Income tax expense                                                               2,858          --            5,611           --
                                                                             ---------   ---------        ---------    --------- 

          Net income (loss) from continuing operations                           4,951     (13,995)           9,642       (24,093)

Discontinued operations -
  Loss on disposal of IPEC Clean, Inc., net of taxes                            (6,664)         --           (6,664)          --
                                                                             ---------   ---------        ---------    --------- 

          Net Income (loss)                                                    (1,713)    (13,995)           2,978      (24,093)

Cumulative dividend on preferred stock                                             (61)        (51)            (122)        (102)
                                                                             ---------   ---------        ---------    --------- 

          Net income (loss) attributable to common shareholders              $  (1,774)  $ (14,046)       $   2,856    $ (24,195)
                                                                             =========   =========        =========    ========= 



Net income (loss) from continuing operations per common share:
          Basic                                                              $     .28   $    (.79)       $     .54   $   (1.36)
                                                                             =========   =========        =========    ========= 
          Diluted                                                                  .26        (.79)             .50       (1.36)
                                                                             =========   =========        =========    ========= 

Income (loss) per common share:
          Basic                                                              $    (.10)  $    (.79)       $     .16   $    (1.36)
                                                                             =========   =========        =========    ========= 
          Diluted                                                                 (.10)       (.79)             .15        (1.36)
                                                                             =========   =========        =========    ========= 


Shares used in basic per share calculation                                      17,599      17,880           17,526       17,850
                                                                             =========   =========        =========    ========= 
Shares used in diluted per share calculation                                    19,208      17,880           19,351       17,850
                                                                             =========   =========        =========    ========= 
</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 SIX MONTHS ENDED DECEMBER 31, 1998
                      (in thousands, except share amounts)
                                   (Unaudited)



<TABLE>
                                            Series B                                           Class A                            
                                         Preferred Stock       Common Stock                  Common Stock           Additional     
                                         ---------------   -----------------------      ----------------------       Paid-In       
                                         Shares   Amount     Shares        Amount         Shares       Amount         Capital      
                                         ------   ------   ----------    ----------     ---------     --------       ----------    
<S>                                      <C>      <C>     <C>            <C>            <C>           <C>            <C>           
Balance -                                                                                                                          
June 30, 1998                            43,850     $--    17,530,368    $      175       223,675     $        2     $  196,242    

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

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

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

Exercise of Stock Options                    --      --        13,436            --            --             --            120    

Employee Stock Purchase Plan                 --      --        49,545            --            --             --             --   

Unearned compensation, net                   --      --         5,824            --            --             --            233    

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

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

Balance -                                ------     ---    ----------    ----------     ---------       --------     ----------
  December 31, 1998                      36,646     $--    17,906,000    $      178         7,186     $       --     $  196,594    
                                         ======     ===    ==========    ===========    =========       ========     ==========
</TABLE>


<TABLE>
                                                          Foreign
                                                          Currency 
                                          Accumulated    Translation
                                           Deficit       Adjustment
                                          ----------     ---------- 
<S>                                       <C>            <C>
Balance -                                                           
June 30, 1998                             $ (100,355)    $     (780)

Net loss                                     (24,093)            --

Conversion of Series B
   Preferred Stock                                --             --

Conversion of Class A
  Common Stock                                    --             --

Exercise of Stock Options                         --             --

Employee Stock Purchase Plan                      --             --

Unearned compensation, net                        --             --

Cumulative translation adjustment                 --           (335)

Preferred stock dividends                       (225)            --

Balance -                                 ----------     ----------
  December 31, 1998                       $ (124,673)    $   (1,115)
                                          ==========     ==========
</TABLE>


See accompanying notes to condensed consolidated financial statements.






                        4
<PAGE>   5
        INTEGRATED PROCESS EQUIPMENT CORP. AND SUBSIDIARIES
          CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                           (in thousands)
                            (Unaudited)






<TABLE>
<CAPTION>
                                                                          SIX MONTHS ENDED
                                                                             DECEMBER 31, 
                                                                       ------------------------
                                                                          1997          1998
                                                                       ---------     ---------- 
<S>                                                                    <C>           <C>
Cash flows from operating activities:                                         
   Net income (loss)                                                   $   2,978     $ (24,093)
   Adjustments to reconcile net loss to net cash used in
   operating activities:
        Loss on disposal of IPEC Clean, Inc., net of taxes                 6,664            --
        Depreciation and amortization                                      5,149         6,531
        Deferred tax expense                                               5,705            --
        Changes in assets and liabilities:
           (Increase) Decrease in accounts receivable                    (22,315)       13,529
           Increase in inventories                                       (10,262)         (999)
           (Increase) Decrease in prepaid expenses and other assets       (1,774)        1,340
           (Increase) Decrease in accounts payable                           589        (5,123)
           (Increase) Decrease in accrued liabilities                      1,063        (3,890)
           Increase in net assets of discontinued operations                (802)           --
                                                                       ---------     ---------- 
              Net cash used in operating activities                      (13,005)      (12,705)
                                                                       ---------     ---------- 

Cash flows from investing activities:
    Purchases of property and equipment, net                              (8,693)       (2,983)
    Proceeds from the maturities of short-term investments                    --        10,386
                                                                       ---------     ---------- 
             Net cash provided by (used in) investing activities          (8,693)        7,403
                                                                       ---------     ---------- 

Cash flows from financing activities:
    Proceeds from long-term debt                                         111,181            --
    Repayment of long-term debt and capital leases                       (26,501)         (723)
    Repayment of notes payable                                              (124)           --
    Payment of preferred stock dividends                                    (123)         (225)
    Net proceeds from issuance of common stock and warrants                3,798           353
                                                                       ---------     ---------- 
              Net cash provided by (used in) financing activities         88,231          (595)
                                                                       ---------     ---------- 

Effect of exchange rate changes on cash                                   (1,036)         (335)
                                                                       ---------     ---------- 

Net increase (decrease) in cash and cash equivalents                      65,497        (6,232)

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


Cash and cash equivalents, end of period                               $ 106,153     $   7,866
                                                                       =========     =========


Supplemental disclosure of cash flow information:
    Cash paid for interest during the period                           $     421     $   3,742
                                                                       =========     =========
</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
December 31, 1998 and for the three month and six month periods ended December
31, 1998 are unaudited; however, in the opinion of the management of Integrated
Process Equipment Corp. ("IPEC") and subsidiaries (the "Company"), such
statements include all adjustments (consisting solely of normal recurring
accruals) necessary for the fair statement of the information presented therein.
The condensed consolidated balance sheet as of June 30, 1998 was derived from
the audited financial statements at such date.

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

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

USE OF ESTIMATES

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

ORGANIZATION:

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

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

         On November 19, 1998, the Company and SpeedFam International, Inc.
("SpeedFam") entered into an Agreement and Plan of Merger. Upon consummation of
the merger, holders of


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

IPEC common stock and Class A Common Stock will receive 0.71 of a share of
SpeedFam common stock for each share of IPEC stock they own. Holders of IPEC
Series B-1, B-2 and B-3 preferred stock will receive 8.90, 8.10 and 10.65
shares, respectively, of SpeedFam common stock for each share they own.

                   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Income (loss) per share of common stock:

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

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


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

<TABLE>
<CAPTION>

                                                                     Three Months Ended                        Six Months Ended
                                                                         December 31,                             December 31,
                                                               ----------------------------             ----------------------------
                                                                 1997             1998                      1997            1998
                                                               ----------------------------             ----------------------------
<S>                                                             <C>            <C>                      <C>             <C>
BASIC EARNINGS (LOSS) FROM CONTINUING OPERATIONS
  PER COMMON SHARE:

  Net income (loss) from continuing operations                  $ 4,951         $(13,995)               $ 9,642         $(24,093)
  Cumulative dividend on preferred stock                            (61)             (51)                  (122)            (102)
                                                                -------         --------                -------         --------
                                                                
    Net income (loss) from continuing operations
     attributable to common stockholders                        $ 4,890         $(14,046)               $ 9,520         $(24,195)
                                                                =======         ========                =======         ========

   Weighted average number of common shares outstanding          17,599           17,880                 17,526           17,850 
                                                                =======         ========                =======         ========

   Basic earnings (loss) from continuing operations per share   $   .28         $   (.79)               $   .54         $  (1.36)
                                                                =======         ========                =======         ========  

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

  Net income (loss) from continuing operations attributable
   to common stockholders                                       $ 4,890         $ (14,046)              $ 9,520         $(24,195)
  Add back: Cumulative dividend on preferred stock                   61               N/A                   122              N/A
                                                                -------          --------               -------         --------
                                                                $ 4,951         $(14,046)               $ 9,642         $(24,195)
                                                                =======          ========               =======         ========
   
  Weighted average number of shares outstanding                  17,599            17,880                17,526           17,850 

  Add: Shares of Series B Convertible
   Preferred Stock assuming conversion                              554               N/A                   554              N/A

  Add: Stock options and warrants                                 1,055               N/A                 1,271              N/A
                                                                -------         ---------               -------         --------
 
  Weighted average number of shares used to compute
   diluted earnings (loss) per share                             19,208            17,880                19,351           17,850
                                                                =======         =========               =======         ========

  Diluted earnings (loss) per share                             $   .26         $   (.79)               $   .50         $  (1.36)
                                                                =======         ========                =======         ========

BASIC NET INCOME (LOSS) PER COMMON SHARE:

  Net income (loss) attributable to common stockholders         $(1,744)        $(14,046)               $ 2,856         $(24,195)
  Weighted average number of shares outstanding                  17,599           17,880                 17,526           17,850
                                                                =======         ========                =======         ========

  Basic net income (loss) per common share                      $  (.10)        $   (.79)               $   .16         $  (1.36)
                                                                =======         ========                =======         ========

DILUTED NET INCOME (LOSS) PER COMMON SHARE:

  Net income (loss)                                             $(1,774)        $ (14,046)              $  2,856        $(24,195)
  Add back: Cumulative dividend on preferred shares                 N/A               N/A                    122             N/A
                                                                -------         --------                --------        --------

  Net income (loss) used in computation                         $(1,774)        $ (14,046)              $  2,978        $(24,195)
                                                                =======          ========               ========        ========

  Weighted average number of shares outstanding                  17,599            17,880                 17,526          17,850

  Add: Shares of Series B Convertible Preferred
   Stock assuming conversion                                        N/A               N/A                    554             N/A

  Add: Stock options and warrants                                   N/A               N/A                  1,271             N/A
                                                                -------          --------               --------        --------

  Weighted average number of shares used to
   compute diluted earnings (loss) per share                     19,208            17,880                 19,351          17,850
                                                                =======          ========               ========        ========

  Diluted earnings (loss) per share                             $   (.10)        $   (.79)              $    .15        $  (1.36)  
                                                                =======          ========               ========        ========
</TABLE>
 
     
<PAGE>   9
INVENTORIES:

         Inventories are summarized as follows (in thousands):

<TABLE>
<CAPTION>
                                         June 30, 1998      December 31, 1998
                                         -------------      -----------------
                                                              (Unaudited)
<S>                                      <C>                <C>           
    Raw materials                        $   48,422             $  55,729
    Work in process                          19,880                20,211
    Finished goods                            5,103                   268
                                         ----------             ---------
                                             73,405                76,208
    Less inventory obsolescence reserve      (6,356)               (7,016)
                                          ---------             ---------
                                                                
                                         $   67,049             $  69,192  
                                         ==========             =========
</TABLE>
                                                           
LONG-TERM DEBT:

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

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

                                       9
<PAGE>   10
COMPREHENSIVE INCOME (in thousands):

Effective July 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" which establishes standards
to report and display comprehensive income and its components in a full set of
general purpose financial statements. The Company's comprehensive income was as
follows:

<TABLE>
<CAPTION>
                                                             Three Months Ended             Six Months Ended
                                                                December 31,                   December 31,
                                                         -------------------------       ------------------------
                                                           1997            1998            1997            1998
                                                         --------        ---------        --------        -------- 
<S>                                                      <C>             <C>             <C>             <C>      
Net income (loss)                                        $ (1,713)       $(13,995)       $  2,978        $(24,093)
Other comprehensive income:
          Foreign currency translation adjustments         (1,028)           (310)         (1,036)           (335)
                                                         --------        --------        --------        ---------
Comprehensive income (loss)                              $ (2,741)       $(14,305)       $  1,942        $(24,428)
                                                         ========        ========        ========        =========
</TABLE>

                         PART I - FINANCIAL INFORMATION

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

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

OVERVIEW

IPEC is a Delaware corporation primarily engaged in designing, manufacturing,
marketing and servicing equipment for the semiconductor manufacturing industry.
IPEC is organized into two principal divisions. IPEC Planar manufactures CMP
equipment and CMP-related products. IPEC Precision manufactures advanced
plasma-assisted chemical etch systems and metrology equipment for use primarily
in manufacturing silicon wafers and semiconductor devices.
 
IPEC's revenue is derived from the sale of products and related spare parts and
service. IPEC recognizes product and spare part revenue when the product or part
is shipped. Service revenue is recognized ratably over the term of service
contracts or in some cases upon completion of service.
 

                                       10
<PAGE>   11
IPEC's gross margin has varied in the past and may vary significantly in the
future due to many factors and is especially dependent on the percentage of
sales through distributors, materials costs, product mix and favorable terms
given to customers to introduce new products, penetrate new markets and
accelerate purchases. IPEC sells directly in the United States, and such sales
historically have had a higher gross margin than indirect international sales.
Gross margins in any period may not be indicative of margins for future periods.
Because IPEC Precision's customer base is new, IPEC believes that IPEC
Precision's gross margin could be lower than the gross margin for IPEC's CMP
tools. As new products are introduced by IPEC Precision in future quarters,
IPEC's gross margin may decrease.
 
IPEC incurred net losses of $24.1 million in the six months ended December 31,
1998, $42.3 million in fiscal 1998, $33.7 million in fiscal 1997 and $10.7
million in fiscal 1996. IPEC's loss in the six months ended December 31, 1998
resulted primarily from a world wide slowdown in the semiconductor and silicon
wafer manufacturing industries. IPEC's fiscal 1998 net loss included a $25.9
million net charge to increase the valuation allowance for IPEC's deferred tax
assets and a $10.6 million charge to record an additional write-down of the
assets in connection with the closure of IPEC Clean. IPEC's fiscal 1997 net loss
included a $25.0 million charge (net of taxes) for estimated losses on disposal
of IPEC Clean, a $3.6 million loss (net of taxes) from IPEC Clean operations of
fiscal 1997, and a $17.6 million pretax charge for asset write downs due to the
discontinuation of the Avanti 672 program development effort. IPEC's fiscal 1996
net loss included a one-time pretax charge of $37.0 million for the purchase of
in-process research and development in connection with the acquisitions of IPEC
Planar Portland and IPEC Precision.
 
IPEC expects to incur losses until semiconductor industry conditions improve,
especially in Asia, and order levels increase. Gross margins in fiscal 1999 are
expected to decline from fiscal 1998 due to the distribution of fixed costs over
a smaller revenue base. Although IPEC has initiated cost-containment measures
and will continue to review its cost structure, these measures alone are not
expected to improve operating results to a profitable level in fiscal 1999. A
significant portion of IPEC's operating expenses is relatively fixed in nature
and planned expenditures are based in part on anticipated orders. Ongoing
expenditures for product development, engineering and customer support make it
difficult to reduce expenses in a particular quarter if IPEC's sales projections
for the quarter are not met. Any inability to reduce spending quickly enough to
mitigate any revenue shortfall would magnify the adverse impact of the revenue
shortfall on IPEC's results of operations.



                                       11
<PAGE>   12
RESULTS OF  OPERATIONS

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

<TABLE>
<CAPTION>
                                                               PERCENT OF TOTAL REVENUE        PERCENT OF TOTAL REVENUE
                                                                  THREE MONTHS ENDED               SIX MONTHS ENDED
                                                                     DECEMBER 31                      DECEMBER 31
                                                             -----------------------------     --------------------------

   
                                                                1997              1998           1997             1998
                                                             ------------       ----------     ----------       ---------
<S>                                                          <C>                <C>            <C>              <C>   
Revenue                                                           100.0%           100.0%         100.0%          100.0%
Cost of goods sold                                                 54.6%            86.1%          55.6%           81.4%
                                                             ------------       ----------     ----------       ---------
        Gross margin                                               45.4%            13.9%          44.4%           18.6%
                                                             ------------       ----------     ----------       ---------
Operating expenses:
     Research and development                                      14.4%            48.1%          13.8%           39.4%
     Selling, general and administrative                           16.9%            39.0%          16.1%           35.5%
                                                             ------------       ----------     ----------       ---------
        Total operating expenses                                   31.3%            87.1%          29.9%           74.9%
                                                             ------------       ----------     ----------       ---------
    

        Operating income (loss)                                    14.1%           (73.2%)         14.5%          (56.3%)
Other income (expense):
     Interest income                                                2.7%             5.6%           1.6%            4.5%
     Interest expense                                             (3.4%)           (11.4%)         (2.2%)          (9.5%)
     Other, net                                                      --              (.1%)            --            4.8%
                                                             ------------       ----------     ----------       ---------
        Total other income (expense)                                (.7%)           (5.9%)          (.6%)          (0.2%)
                                                             ------------       ----------     ----------       ---------

        Income (loss) from continuing operations before            13.4%           (79.1%)         13.9%          (56.5%)
        income taxes
Income tax expense (benefit)                                        4.9%               --           5.1%              --  
                                                             ------------       ----------     ----------       ---------

            Income (loss) from continuing operations                8.5%           (79.1%)          8.8%          (56.5%)

Discontinued operations - loss on disposal of IPEC Clean,        (11.5%)               --          (6.1%)             --
net of taxes
                                                             ------------       ----------     ----------       ---------

        Net income (loss)                                         (3.0%)           (79.1%)          2.7%          (56.5%)
                                                             ============       ==========     ==========       =========
</TABLE>


                                       12
<PAGE>   13
QUARTER ENDED DECEMBER 31, 1998 COMPARED TO QUARTER ENDED DECEMBER 31, 1997

REVENUE.  Revenue was $17.7 million for the quarter ended December 31, 1998
compared to $57.9 million for the quarter ended December 31, 1997, which was the
highest quarterly level of revenue in IPEC's history. The 69% decrease resulted
from downturns in the semiconductor and silicon wafer industries. IPEC
anticipates lower revenue levels for fiscal 1999 compared to fiscal 1998 as a
result of these economic conditions. Revenue from international sales
represented 42% of total revenue for the quarter ended December 31, 1998 and 49%
of total revenue for the quarter ended December 31, 1997.
 
COST OF GOODS SOLD.  Cost of goods sold as a percentage of revenue increased to
86.1% for the quarter ended December 31, 1998 from 54.6% for the quarter ended
December 31, 1997. This increase resulted primarily from increased fixed 
manufacturing and field service expenses incurred to build, support and service
new products spread over a smaller revenue base. Additionally, IPEC received a
settlement of $1.1 million, included in revenue, from a major customer for
cancellation of orders in the quarter ended December 31, 1998. IPEC incurred a
corresponding $1.1 million charge to cost of goods sold to reduce the valuation
of inventory related to these orders in the quarter ended December 31, 1998.
Because revenue is not expected to increase until conditions improve in the
semiconductor and silicon wafer industries, cost of goods sold as a percentage
of revenue is expected to remain high, adversely affecting gross margins.
 
RESEARCH AND DEVELOPMENT.  Research and development expense increased 2% for the
quarter ended December 31, 1998 to $8.5 million from $8.3 million for the
quarter ended December 31, 1997. IPEC also incurred a non-recurring charge of
$375,000 in the quarter ended December 31, 1998 for development costs to a third
party for an integrated cleaning tool. As a result of the economic downturn in
the semiconductor and silicon wafer industries, IPEC had implemented cost
reduction plans in non-critical research and development projects beginning in
the fourth quarter of fiscal 1998 through the second quarter of fiscal 1999. As
a result of these cost reduction plans, research and development expense for the
quarter ended December 31, 1998 decreased 13% from $9.7 million for the quarter
ended June 30, 1998. IPEC is continuing to develop the AvantGaard 676 and
AvantGaard 776. Current development efforts also include a 300mm integrated CMP
system (the AvantGaard 876), plasma-assisted chemical etch systems, metrology
technologies and copper and dual damascene CMP processes.
 
SELLING, GENERAL AND ADMINISTRATIVE.  Selling, general and administrative
expenses decreased 29% to $6.9 million for the quarter ended December 31, 1998
compared to $9.8 million for the quarter ended December 31, 1997. The $2.9
million decrease resulted primarily from reduced commission expense from lower
foreign selling activity, cost reduction programs and certain patents becoming
fully amortized in the first quarter of fiscal 1999. Cost reduction programs
have included headcount reductions, mandatory shut downs during holiday periods
and certain project reductions.
 
INTEREST INCOME AND INTEREST EXPENSE.  Interest income decreased to $983,000 for
the quarter ended December 31, 1998 from $1.6 million for the quarter ended
December 31, 1997. The decrease resulted from lower aggregate cash, cash
equivalents and short-term investment amounts and lower interest rates during
the quarter ended December 31, 1998 compared to the quarter ended December 31,
1997. Interest expense was $2.0 million for each of the quarters ended December
31, 1998 and 1997. IPEC's interest expense results primarily from the $115.0
million, 6.25% IPEC Convertible Notes financing completed in September 1997.
 
INCOME TAX EXPENSE.  IPEC did not record an income tax benefit for the quarter
ended December 31, 1998, due to the uncertain nature of the ultimate realization
of a future tax benefit. IPEC does not anticipate recording income tax expense
or benefits in fiscal l999. Income tax expense for the quarter ended December
31, 1997 was $2.9 million, an effective tax rate of 36.6%.
 
LOSS ON DISPOSAL OF IPEC CLEAN.  IPEC incurred a loss of $6.7 million, net of
taxes, in the quarter ended December 31, 1997 to write down the net assets of
IPEC Clean. IPEC had been negotiating the sale of IPEC Clean in calendar 1997.
However, the deteriorating business climate in the Pacific Rim resulted in a
delay of expected purchase orders from IPEC Clean customers and IPEC was unable
to consummate the transaction. IPEC closed IPEC Clean in the quarter ended March
31, 1998.


                                       13
<PAGE>   14
SIX MONTHS ENDED DECEMBER 31, 1998 COMPARED TO SIX MONTHS ENDED DECEMBER 31,
1997

REVENUE.  Revenue was $42.7 million for the six months ended December 31, 1998
compared to $109.2 million for the six months ended December 31, 1997. The 61%
decrease from IPEC's record level revenues of the six months ended December 31,
1997 resulted from downturns in the semiconductor and silicon wafer industries.
IPEC anticipates lower revenue levels for fiscal 1999 compared to fiscal 1998 as
a result of these economic conditions. Revenue from international sales
represented 48% of total revenues for the six months ended December 31, 1998 and
40% of total revenues for the six months ended December 31, 1997.
 
COST OF GOODS SOLD.  Costs of goods sold as a percentage of revenue increased to
81.4% for the six months ended December 31, 1998 from 55.6% for the six months
ended December 31, 1997. This increase resulted primarily from increased fixed
manufacturing and field service expenses incurred to build support and service
new products spread over a smaller revenue base. Additionally, the Company
incurred increased expenses for product installation and process acceptance for 
the AvantGaard 776. Because revenue is not expected to increase until conditions
improve in the semiconductor and silicon wafer industries, cost of goods sold as
a percentage of revenue is expected to remain high, adversely affecting gross
margins.
 
RESEARCH AND DEVELOPMENT.  Research and development expense increased 12% to
$16.8 million for the six months ended December 31, 1998 from $15.1 for the six
months ended December 31, 1997. IPEC has implemented cost reduction plans in
non-critical research and development projects.
 
SELLING, GENERAL AND ADMINISTRATIVE.  Selling, general and administrative
expense decreased 14% to $15.1 million for the six months ended December 31,
1998 compared to $17.6 million for the six months ended December 31, 1997. The
$2.5 million decrease resulted primarily from lower international sales activity
for the six months ended December 31, 1998 compared to the six months ended
December 31, 1997 and cost reduction programs implemented in the second half of
fiscal 1998 and the first six months of fiscal 1999.
 
INTEREST INCOME AND INTEREST EXPENSE.  Interest income increased to $1.9 million
for the six months ended December 31, 1998 from $1.8 million for the six months
ended December 31, 1997. The increase resulted from investing proceeds of the
$115.0 million, 6.25% IPEC Convertible Notes financing completed in September
1997 for the full six months ended December 31, 1998, compared to approximately
three months, October, November and December, in fiscal 1997. Lower interest
rates for invested funds and lower invested amounts arising from operating
losses will result in reduced amounts of interest income for the remainder of
fiscal 1999 when compared to similar periods in fiscal 1998. Interest expense
increased to $4.0 million for the six months ended December 31, 1998 from $2.4
million for the six months ended December 31, 1997 as a result of the $115
million, 6.25% IPEC Convertible Notes being outstanding for the whole period in
the six months ended December 31, 1998 compared to three and one half months in
the six months ended December 31, 1997.
 
INCOME TAX EXPENSE.  IPEC did not record an income tax benefit for the six
months ended December 31, 1998, due to the uncertain nature of the ultimate
realization of a future tax benefit. Income tax expense for the six months ended
December 31, 1997 was $5.6 million, an effective tax rate of 36.8%.


                                       14
<PAGE>   15

LIQUIDITY AND CAPITAL RESOURCES

IPEC's principal sources of liquidity include cash, cash equivalents and
short-term investments of $67.5 million as of December 31, 1998, a decrease of
$16.6 million from June 30, 1998. The decrease in cash, cash equivalents and
short-term investments in the first six months of fiscal 1999 resulted primarily
from operating losses.
 
As of December 31, 1998, IPEC had $144.5 million of working capital compared
with $164.2 million as of June 30, 1998. IPEC's accounts receivable decreased to
$30.3 million as of December 31, 1998 as compared to $43.8 million as of June
30, 1998. The decrease in accounts receivable was primarily due to lower levels
of sales activity in the first six months of fiscal 1999 compared to the last
half of fiscal 1998. IPEC's day's sales outstanding increased to 157 days as of
December 31, 1998 compared to 103 days at June 30, 1998. This increase has
resulted from lower revenues, extended terms given to certain customers and
delays in final acceptance for certain AvantGaard 776 tools in the quarter ended
December 31, 1998. IPEC's allowance for doubtful accounts has increased slightly
to $2.1 million as of December 31, 1998 from $1.8 million as of June 30, 1998.
While certain customer receivables may extend beyond normal collection periods,
IPEC believes accounts receivable amounts are collectible and allowances are
adequate.
 
IPEC's inventory increased to $69.2 million as of December 31, 1998 from $67.0
million as of June 30, 1998. The increase in inventory was primarily due to
lower sales activity in the first six months of fiscal 1999 and to fulfill
non-cancelable purchase obligations to vendors under long-term purchase
commitments. Although there was an increase in inventory from June 30, 1998 to
December 31, 1998, reductions should occur in future quarters as a result of
reduced purchasing activity. IPEC's annualized inventory turnover decreased to
0.9 times per year as of December 31, 1998 compared to 2.0 times per year at
June 30, 1998. This decrease has also resulted from lower levels of sales
activity. IPEC's allowance for inventory obsolescence increased to $7.0 million
at December 31, 1998 compared to $6.4 million at June 30, 1998. Due to the
severe downturn in the


                                       15
<PAGE>   16
semiconductor capital equipment industry from record level revenues in the first
half of fiscal 1998, IPEC's inventory levels are higher than currently required.
However, IPEC believes that inventory values are recoverable and that inventory
will be utilized in future periods as the industry recovers. Reduced purchasing
by IPEC also resulted in a decreased accounts payable balance of $5.3 million at
December 31, 1998 compared to $10.4 million at June 30, 1998.
 
IPEC's property, plant and equipment additions were $3.0 million in the first
six months of fiscal 1999 compared to $8.7 million in the first six months of
fiscal 1998. These additions consisted primarily of testing and demonstration
equipment related to the AvantGaard 676, 776 and 876 systems.
 
Total long-term debt decreased to $117.9 million as of December 31, 1998 from
$118.6 million as of June 30, 1998. Total long-term debt as a percentage of
stockholders' equity increased to 166% as of December 31, 1998 from 125% as of
June 30, 1998.
 
IPEC believes that its cash, cash equivalents and short-term investments will be
sufficient to fund its operations for the foreseeable future. IPEC's cash needs
depend on, among other things, the length of the economic slowdown, the extent
of future operating losses that will require funding, additional working capital
requirements, whether IPEC is forced by competitive pressures and commercial
terms to continue or increase extended terms for accounts receivable and whether
IPEC acquires other companies or businesses. If IPEC requires additional cash,
there can be no assurance that such additional financing will be available when
needed, or, if available, will be available on satisfactory terms. In order to
raise capital, IPEC may issue debt or equity securities which could result in
substantial dilution. The failure to obtain additional financing when needed on
satisfactory terms would also hinder IPEC's ability to invest in capital
equipment and working capital.
 
YEAR 2000 COMPUTER ISSUES
 
IPEC has identified the changes required to its computer programs and hardware.
IPEC expects to complete the necessary modifications to its centralized
financial, customer and operational information systems by the end of calendar
1998. IPEC is currently reviewing noncentralized systems, such as software used
to operate its products, for year 2000 problems. IPEC expects to complete
modifications to software used to operate its products by the end of the first
quarter of calendar 1999. IPEC has completed modifications to other
noncentralized systems. IPEC expects to incur costs to remedy year 2000 problems
in the future, primarily for non-business systems such as software used to
operate its products. IPEC does not currently anticipate these costs will be
material. If IPEC or third parties with whom it has relationships were to cease
or unsuccessfully complete their year 2000 remediation efforts, IPEC may
encounter disruptions in its business. IPEC has not currently established a
formal year 2000 contingency plan but will consider and, if necessary, address
doing so as part of its year 2000 review process. IPEC maintains and deploys
contingency plans designed to address various other potential business
interruptions. These plans may address interruptions resulting from third
parties' failure to be year 2000 ready.

RISK FACTORS

         You should carefully consider the risks described below. These risks
are not the only ones facing us. Additional risks and uncertainties presently
unknown to us or that we currently believe 

                                       16
<PAGE>   17
are immaterial may also impair our business operations. If any of the following
risks actually occur, our business, financial condition or results of operations
could be seriously harmed.

RISKS RELATED TO THE MERGER

In November 1998, we signed an agreement to be acquired by SpeedFam if certain
events occur. There are numerous risks associated with the SpeedFam transaction.

IF SPEEDFAM'S TRADING PRICE DECREASES, THE VALUE RECEIVED BY OUR STOCKHOLDERS
WILL ALSO DECREASE.

The exchange ratio is fixed. It will not change even if the price of SpeedFam
stock changes. The market price of SpeedFam common stock has in the past
fluctuated greatly and may continue to fluctuate in the future. We strongly
encourage our stockholders to obtain the current market price of SpeedFam common
stock.

IF SPEEDFAM AND IPEC DO NOT INTEGRATE THEIR TECHNOLOGY AND OPERATIONS QUICKLY
AND EFFECTIVELY, THE POTENTIAL BENEFITS OF THE MERGER MAY NOT OCCUR.

Speedfam and IPEC must integrate the following components of their operations:

-        product offerings, including marketing of products to the other's
         customers.

-        research and development programs.

-        manufacturing operations and philosophies. SpeedFam assembles
         components purchased from multiple vendors, while IPEC manufactures 
         many of its products' components and purchases others from vendors.

-        sales and marketing operations, including international distribution
         channels. Internationally, SpeedFam distributes its products through a
         direct sales force while IPEC uses distributors. Combining
         international sales channels could result in expense or customer
         confusion.

-        field service support for CMP equipment.

-        management information and reporting systems. Since SpeedFam and IPEC
         currently use different management information systems, the combined
         company may face difficulties obtaining timely and accurate
         information, data and reports to operate the combined company
         effectively until integration is completed.

We cannot be certain that all of these can be achieved without adversely
impacting operations. To the extent management focuses on integration, it cannot
also develop the business.

THE MERGER MAY RESULT IN A LOSS OF KEY EMPLOYEES.

The combined company's success following the merger depends on retaining and
integrating SpeedFam and IPEC personnel. SpeedFam has signed agreements with a
few key IPEC employees to retain their services. Other employees may leave
following the merger for the following reasons.

-        SpeedFam and IPEC have different corporate cultures. IPEC's employees
         have greater autonomy than in SpeedFam's organization, which emphasizes
         more centralized planning and control methods.

-        Competition for qualified personnel in our industry, particularly in
         Phoenix, Arizona, is intense. SpeedFam and IPEC have in the past
         experienced difficulty in attracting qualified personnel. We expect to
         experience the same difficulty in the future.

-        Competitors may recruit employees prior to the merger and during
         integration. This is common in high technology mergers.

                                       17
<PAGE>   18
THE SUBSTANTIAL EXPENSES OF THE MERGER WILL REDUCE OUR PROFITS.

SpeedFam and IPEC will incur substantial expenses to complete the merger,
including

-        estimated costs of $6.5 million for financial, accounting and legal
         advisors and for special shareholder meetings

-        integration costs that currently cannot be estimated.

         These expenses will delay and reduce the combined company's
profitability for at least one year following the merger. Additional costs
presently unknown may reduce profitability after the merger, and may result in
the possibility of charges to be taken by the combined company.

IF THE CONDITIONS TO THE MERGER ARE NOT MET, THE MERGER WILL NOT OCCUR.

Several conditions must be satisfied or waived to complete the merger. We cannot
be certain that each of these conditions will be satisfied or waived. Some of
these conditions, such as third party consents, are out of our control.

RISKS RELATED TO BUSINESS AND OPERATIONS

WE HAVE HISTORICALLY HAD LOSSES AND EXPECT LOSSES IN THE NEAR FUTURE.

Prior to our acquisition of IPEC Planar Phoenix in fiscal 1994, we did not have
significant revenue.

-        In fiscal 1996, we had net losses of $10.7 million.

-        In fiscal 1997, we had net losses of $33.7 million.

-        In fiscal 1998, we had net losses of $42.3 million.

-        In the first quarter of fiscal 1999, we had a net loss of $10.1
         million. In the second quarter of fiscal 1999, we had a net loss of
         $14.0 million.

OUR QUARTERLY OPERATING RESULTS WILL VARY.

Our quarterly operating results vary due to a variety of factors, including

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

-        the timing of significant shipments

-        accelerations, delays, cancellations or postponement of orders

-        the gain or loss of significant customers

-        competitive pressures

-        general economic conditions, especially in Asia

-        availability and costs of components from our suppliers

                                       18
<PAGE>   19
-        the timing of product announcements and introductions and process
         qualifications by us, our customers or our competitors

-        our ability to manufacture, test and deliver products in a timely and
         cost-effective manner

-        the level of field service operations

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

-        changes in the mix of products sold;

-        delayed or canceled construction of wafer fabrication facilities by
         customers

-        research and development expenses for new products

-        market acceptance of new or enhanced versions of our and our customers'
         products

-        reductions in personnel

-        discontinuance of operations

-        the sufficiency of personnel and capital resources to support
         operations

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

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

-        In the second half of calendar 1996, an industry-wide slowdown in the
         semiconductor equipment market reduced sales of our CMP equipment. Our
         revenue from sales of CMP equipment in each of the first three-quarters
         of fiscal 1997 was lower than such revenue in each of the first three
         quarters of fiscal 1996. Fiscal 1997 revenue was less than fiscal 1996
         revenue.

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

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

-        In the second quarter of fiscal 1998, we had a net loss due to a $10.6
         million charge for the remaining unsold net assets of IPEC Clean.

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

                                       19
<PAGE>   20
You should not consider results of operations in any period as an indication of
future results. Fluctuations in operating results may also result in
fluctuations in our stock price. In future quarters, our operating results may
not meet the expectations of public market analysts or investors. In such an
event, the trading price of our stock could decline.

THE TIMING OF SIGNIFICANT SHIPMENTS AND ORDERS CAN AFFECT OUR QUARTERLY RESULTS.

We derive most of our revenue from the sale of products in a price range from
$250,000 to $3.5 million per unit. As a result, the timing of individual
shipments can have a significant impact on our results of operations for a
particular period. We have experienced order and delivery delays and
cancellations that caused us to miss our quarterly revenue and profit
projections. In the second quarter of fiscal 1999, for example, revenue was
below expectations because a customer postponed the shipment of a CMP tool.

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

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

IF THE CURRENT SLOWDOWN IN OUR INDUSTRY CONTINUES, OUR BUSINESS WILL SUFFER.

We are currently experiencing a slowdown in product demand and volatility in
product pricing for the following reasons:

-        the highly cyclical nature of the industry

-        the excess production capacity of our customers

-        the financial crisis in Asia

This slowdown has reduced our revenue. Despite the slowdown, we continue to
invest in research and development and customer support to remain competitive.
This will result in reduced profitability. In certain instances, industry
downturns have lasted for extended periods of time.

THE ASIAN FINANCIAL CRISIS IS HARMING OUR BUSINESS.

A substantial portion of worldwide semiconductor manufacturing capacity is
located in Asia. Asian countries, particularly Japan and Korea, are experiencing
banking, currency and other problems that are contributing to economic slowdowns
or recessions in those countries. Our U.S. dollar-denominated products have
become relatively more expensive in certain Asian countries. In the second half
of fiscal year 1998, several Korean customers were unable to obtain satisfactory


                                       20
<PAGE>   21
financing terms to allow them to place volume orders. We believe that certain of
these customers will be unable to place volume orders for the remainder of
fiscal 1999. If Asian economies do not recover, capital investment by Asian
customers may continue to be adversely affected.

WE FACE INTENSE COMPETITION.

Several companies currently market CMP systems that directly compete with our
products, including Applied Materials, Ebara, SpeedFam and Strasbaugh. We
believe that direct domestic and international competition in CMP polishing
systems and clustered CMP polishing and cleaning systems is likely to increase
substantially. For several reasons, we cannot be certain that we can effectively
compete with these companies.

-        Several semiconductor manufacturers have been evaluating whether they
         will adopt our AvantGaard 676 or AvantGaard 776, particularly for the
         oxide process, or comparable high-throughput products from our
         competitors. Some of our major customers may wish to utilize different
         CMP suppliers for different processes.

-        Some of our competitors provide customers with evaluation tools and
         have greater financial resources and name recognition than we do. They
         also have more extensive engineering, manufacturing, marketing and
         customer service and support capabilities.

-        Some of our competitors supply a broader range of semiconductor capital
         equipment than we do. As a result, these competitors may have better
         relationships with semiconductor manufacturers, including our current
         and potential customers.

-        We expect our competitors to continue to improve their existing
         technology and introduce new products. This could cause a decline in
         our sales or lead to intensified price-based competition.

-        Other capital equipment manufacturers not currently involved in the
         development of CMP systems may enter the market or develop technology
         that reduces the need for our products. They may develop alternatives
         to CMP or may enhance existing manufacturing techniques to achieve
         acceptable yields for DRAMs and other integrated circuits involving
         three or more metal layers and line widths at or below 0.35 micron.

WE DEPEND ON A SMALL NUMBER OF MAJOR CUSTOMERS.

For the foreseeable future, we expect that our revenue will continue to depend
on a limited number of major customers. To date, the CMP process has been used
primarily to fabricate advanced semiconductors, which accounts for only a
portion of the overall semiconductor market.

In fiscal 1998, Intel represented 38% and Tokyo Electron represented 12% of our
revenue. In fiscal 1997, Intel represented 51% of our revenue. In fiscal 1996,
Intel represented 35%, Tokyo Electron represented 12% and IBM and Teltec each
represented 11% of our revenue. Our top five customers accounted for 64% of our
revenue in fiscal 1998, 72% in fiscal 1997 and 78% in fiscal 1996.



                                       21
<PAGE>   22
WE MAY NOT DEVELOP PRODUCTS IN TIME TO MEET CHANGING TECHNOLOGIES.

Semiconductor manufacturing equipment and processes are subject to rapid
technological changes and product obsolescence. We are developing a 300 mm CMP
system to address future needs of semiconductor manufacturers. Developing new
products in our rapidly evolving industry involves a number of risks, including
that the products

-        may be introduced behind schedule or after customers have made buying
         decisions

-        may not be accepted in the marketplace

Our strategy depends in part on developing and introducing products that lower
the semiconductor manufacturer's cost of ownership, which involves a number of
factors, including product acquisition and operating expenses, throughput,
reliability, footprint and wafer yields. Failure to successfully develop new
products would harm our future success.

PRODUCT OR PROCESS DEVELOPMENT PROBLEMS COULD HARM OUR RESULTS OF OPERATIONS.

Our products are complex, so they can from time to time have defects or "bugs"
that are difficult to fix. This can harm our results of operations in two ways.

-        We incur substantial costs to ensure the functionality and reliability
         of our products earlier in their life cycle. This can reduce orders,
         increase manufacturing costs, adversely impact working capital and
         increase service and warranty expenses.

-        We experience significant delays between product introduction and
         commercial shipments if we cannot identify and correct defects in a
         timely manner. As a result, we may have to write off inventory and
         other assets related to those products and we could lose customers and
         revenue. In the second quarter of fiscal 1997, IPEC incurred a $17.6
         million pretax asset write-off for discontinuance of the Avanti 672
         product development program.

                                       22
<PAGE>   23
OUR FUTURE SUCCESS DEPENDS ON INTERNATIONAL SALES.

We expect that international sales will continue to account for a significant
portion of our revenue in future periods. International sales accounted for 46%
of our revenue in fiscal 1998, 27% in fiscal 1997 and 28% in fiscal 1996.
International sales are subject to certain risks, including

-        tariffs

-        embargoes and other trade barriers

-        staffing and operating foreign sales and service operations

-        managing distributors

-        collecting accounts receivable

-        foreign and U.S. export laws

-        currency fluctuations

These risks will increase as we establish a fully-staffed Asia Pacific division
to service the Asian market. A direct presence in these markets, particularly
Japan, may also adversely affect our relationship with our current distributors.

IF SUPPLIERS COULD NOT DELIVER GOODS AND SERVICES, OUR BUSINESS WOULD SUFFER.

We rely on a limited number of independent manufacturers to provide certain
components used in our products. If these manufacturers experienced financial,
operational, production or quality assurance problems, we might not be able to
obtain adequate amounts of components.

IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY, OUR BUSINESS COULD
SUFFER.

We may not be able to protect our technology because

-        pending and new patent applications may not be approved

-        third parties may try to challenge, invalidate or design around new
         patents, even if issued

-        time-consuming and costly litigation may be necessary to protect our
         proprietary technologies

-        policing unauthorized use of our intellectual property is difficult and
         expensive

-        the laws of some foreign countries do not protect proprietary rights as
         much as U.S. laws

-        competitors may independently develop similar technology or design
         around our intellectual property


THIRD PARTIES MAY PREVENT US FROM SELLING OUR PRODUCTS THAT INFRINGE ON THEIR
INTELLECTUAL PROPERTY RIGHTS.

We cannot be certain that third parties will not in the future claim that our
products infringe their proprietary rights. Third parties may

                                       23
<PAGE>   24
-        bring claims of patent, copyright or trademark infringement

-        obtain patents or other intellectual property rights that limit our
         ability to do business or require us to license or cross-license
         technology

-        bring costly, time-consuming lawsuits

Third parties hold many patents relating to CMP machines and processes. We
license from a customer the right to manufacture CMP machines employing an
orbital motion in our AvantGaard 676, 776 and 876.

WE ARE EXPOSED TO PRODUCT LIABILITY AND ENVIRONMENTAL REGULATIONS.

Our products could malfunction in the future and damage a customer's facilities
and harm its employees.

We and our customers are subject to stringent federal, state and local
regulations governing the storage, use, discharge and disposal of hazardous
chemicals used in their manufacturing operations. Current or future regulations
could require us or our customers to make substantial expenditures for
preventive or remedial action, reduction of chemical exposure or waste treatment
or disposal.

WE MAY EXPERIENCE YEAR 2000 COMPUTER PROBLEMS THAT HARM OUR BUSINESS.

Certain computer systems may not correctly recognize dates when the year changes
from 1999 to 2000. This could cause computers to either shut down or lead to
incorrect calculations. We have reviewed our exposure to this problem, and do
not believe that we will incur significant expenses either to remedy the problem
or as a result of the effect of the problem on our business. However, year 2000
issues may harm our business for the following reasons.

-        We cannot be certain that the measures we take are enough. Despite our
         efforts, we may need to incur significant expenses to remedy the
         problem or may suffer disruptions in our business.

-        Third parties with whom we have relationships may not successfully
         complete their year 2000 remediation efforts. This could also result in
         disruptions in our business, which would harm our business, financial
         condition, results of operations and prospects.

-        We have not established a formal year 2000 contingency plan.

For a discussion of IPEC's year 2000 policies, refer to "Management's Discussion
and Analysis of Financial Condition and Results of Operation - Year 2000
Computer Issues" on page 16. 



                                       24
<PAGE>   25
The statements above are "Year 2000 Readiness Disclosures" as defined under the
Year 2000 Information and Readiness Disclosure Act. The protections of this Act
do not apply to federal securities fraud actions.


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

(a)      The annual meeting of stockholders of the Company was held on November
         19, 1998.

(b)      The name of each director elected at the meeting is as follows: Sanjeev
         R. Chitre, Roger D. McDaniel, Harold C. Baldauf, William J. Freschi,
         Kenneth Levy.

(c)      The matters voted upon and the results of the voting were as follows:

         (1)      The following five persons were elected as Directors at the
                  annual meeting pursuant to the following vote:

                  Nominee                Votes For          Votes Withheld
                  Sanjeev R. Chitre      15,199,873         579,213
                  Roger D. McDaniel      15,199,873         579,213
                  Harold C. Baldauf      15,199,673         579,413
                  William J. Freschi     15,199,873         579,213
                  Kenneth Levy           15,199,873         579,213

         (2)      The appointment of KPMG Peat Marwick, LLP as the independent
                  auditors of the Company was ratified at the annual meeting
                  pursuant to the following vote:

                  Votes for:          15,393,322

                  Votes Against:         328,318

                  Votes Abstaining:       57,446

                  Broker Non-Votes:           --

         (3)      The amendment of the 1992 Stock Option Plan was approved at
                  the annual meeting pursuant to the following vote:


                  Votes for:          9,620,102             
                                                            
                  Votes Against:      6,121,625     
                                                            
                  Votes Abstaining:      37,359           
                                                            
                  Broker Non-Votes:          --           


                                       25
<PAGE>   26
                                                            
ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K

         (a)      Exhibits
                  
                  Financial Data Schedule

                  Employment and consulting agreement between IPEC and John S. 
                  Hodgson dated November 19, 1998.

                  Consulting agreement between IPEC, Harold Baldauf, Harold
                  Baldauf, Jr. and David Baldauf dated November 19, 1998.

                  Amendment to Preferred Shares Rights Agreement dated November
                  19, 1998

         (b)      Reports on Form 8-K

                  A report on Form 8-K was filed on November 23, 1998 reporting
                  (under Item 5) an Agreement and Plan of Merger among IPEC,
                  SpeedFam International, Inc. and SpeedFam, Inc.


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: February 12, 1999                    INTEGRATED PROCESS EQUIPMENT
                                             CORP. AND SUBSIDIARIES


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


                                      26
<PAGE>   27
                    
                                 EXHIBIT INDEX

                  Exhibits

       27         Financial Data Schedule

       99.A.1     Employment agreement between IPEC and John S. Hodgson dated 
                  November 19, 1998.

       99.A.2     Consulting agreement between IPEC, Harold Baldauf dated
                  November 19, 1998.

       99.A.3     Amendment to Preferred Shares Rights Agreement dated November
                  19, 1998